Mutual fund investments are gaining popularity in recent years and a large number of people are showing their inclination toward mutual fund investments. But you must be educated enough about the financial basics and the procedure of investing in mutual funds. You also need to know how to invest effectively and moreover, what mistakes you must avoid while investing in SIP.
While investing in mutual funds, people can go for a lump sum investment or via a Systematic Investment Plan. For example, if you plan to invest a large amount of money, say Rs 5 lakh in mutual funds in one go, then this type of method is called lump-sum investment. On the other hand, if you choose to make your investments in installments, say Rs 10,000 per month, then this is considered a Systematic Investment Plan (SIP).
Systematic Investment Plan mode of investment is the best method of investment in the mutual fund or can say indirectly into the stock market. So, it can be a more productive and efficient way to invest in the Indian equity market. It facilitates people in building long-term wealth without putting in large investments in one go. But things are not so much straight forward and there are some causes of concern that you must address before investing in the SIP mode. Anyways, if SIPs can make your life more comfortable, they can also add trouble if you don’t use this mode of investment in the right manner.
Here are some common mistakes that the majority of investors do while investing in Mutual Funds through SIPs.
6 Common Mistakes to Avoid While Investing Through SIPs
Investing for short-term
Mutual Fund investing is generally meant for generating wealth in the long run. One common mistake that the majority of investors make is to redeem their investments in the short term in case their portfolios are unable to earn profits.
A lot of people start their Systematic Investment Plan with the objective to make money in a small time period. However, the fact is that when you opt for a small tenure, you are exposing yourself to a higher risk of market volatility. It is highly unlikely that you will get higher returns in a shorter tenure. Remember, SIP investing works on a rupee cost-averaging approach and helps in creating wealth in the long run.
Selecting the wrong SIP amount
While investing in a Mutual Fund via Systematic Investment Plan mode, you must know the right amount to invest in order to attain your financial goals/needs. Because, in general, most people start with a small amount for their SIPs. Choosing a small amount for SIP investment may be because of they do not have much money to invest at the time of starting their SIP or any other reason. However, with the period of time, you should increase the amount in the SIP so as to increase the returns.
There are also some investors who start investing in SIPs with a large amount without analyzing the performance and history of the funds. Moreover, they also don’t track their investments and it causes them to lose at the later stage of investments.
While investing in mutual funds through SIPs, you need to find the right amount to invest that you can easily maintain on a regular basis. You also need to monitor your portfolio closely in order to make decisions regarding whether to increase, decrease or stop your investments in the underlying schemes.
You may read these blogs to have a basic understanding of basic concepts:
- What is a Systematic Investment Plan (SIP)?
- Who is Fund Manager and why he is important for your SIP?
Stopping SIP investments in between
Mutual Fund is associated with long-term investment and it would be highly profitable if you hold your units for a longer period of time. However, on most occasions, investors tend to lose their patience when they find their portfolio bleeding in the short run. A similar situation was witnessed by the Indian economy last year (2018) when most investors found their Equity Mutual Fund portfolio running at a substantial loss.
It is understandable that people may start to panic seeing their portfolio in red. However, the risk of market fluctuations drives the majority of investors to shy away from further investments and this is where they make a mistake.
Missing or forgetting the installments of SIPs
Ironically, you can find many investors who start their Systematic Investment Plan and later forgets it completely. A lot many people have this misconception that long-term wealth creation means it doesn’t require monitoring at all. However, even the soundest mutual fund which is managed by the best fund manager requires monitoring. You need to monitor your mutual fund performances every 6 months or at least a year.
There is no perfect time to start SIP
When it comes to timing the market vs time in the market, it is said that don’t try to time the market. You will never find the right time to enter. Here, time in the market is more important as the longer you stay in the market, the better will become your investment return. Nonetheless, it has been seen that many investors keep waiting for the perfect time to start their SIPs.
The best feature of investing in Mutual Funds through SIPs is that it averages out your costs of investing. And that’s why there isn’t any proper time for you to start your SIP. The earlier you can enter, the higher your chance to build huge wealth and enjoy the benefit of compounding.
Mutual Fund investing through SIPs can help you reach your financial milestones if you invest in the right way. However, investing via SIP requires focus and discipline.