5 SIP Investment Mistakes to Avoid

As a SIP investor, especially if you are a beginner, multiple questions and doubts pertaining to the viability of a SIP are bound to arise. But having said that, SIPs are one of the best long-term wealth generation methods and the best way to avoid mistakes when investing is to be aware of the SIP return calculation. By using a SIP calculator that provides a rough estimate of the SIP maturity amount, you’d be more aware of what you are getting into and will hence be less vulnerable to mistakes as well as more aware of the outcome. 

Now that we have established a starting point, let us learn of the possible avoidable mistakes that an investor can commit while investing in mutual funds. 

Mutual Funds Investability

You must have heard or read about mutual funds being one of the best ways of investing in the stock markets with comparatively low risk when compared to the direct participation of the investors in equities markets, generating comparable fund returns. But have you wondered why?

The reason behind this is the management of the mutual funds is done by professional managers who often have a diversified portfolio, spreading the risk of investing around, automatically making them a more secure way of investing. 

Mutual Funds & SIPs: What is SIP and What are its Kinds?

Before jumping on to the mistakes you can avoid while investing in SIPs, let’s quickly understand what is SIP? 

There are two ways of investing in mutual funds:

  • Lump-Sum Investment
    In a lump-sum scheme, you can invest a consolidated “one-time” sum in the mutual fund, for a fixed time period. Like the FD or bank fixed deposit scheme.

  • SIP

A Systematic Investment Plan comprises a number of payments that an investor needs to make in a fund as regular installments throughout the scheme. In terms of the scope of the method of investment, it can be compared to an RD or bank recurring deposit scheme. 

SIP or the Systematic Investment Plans are the best ways of beginning to invest in mutual funds, making them popular amongst first-time and small investors. There are several avoidable mistakes that investors can prevent in order to realize the full potential of their SIP investments. What are these? Read on to know. 

5 Common SIP Investment Mistakes to Avoid:

Here are the 5 SIP investment mistakes that an investor can avoid while investing in a fund:

  • Starting Late

Just as the other financial instruments, the SIP investments perform best if aided by the power of compounding. For this, it is necessary to invest early as it requires time on its side. Using a SIP calculator can help you determine not only how much wealth you can generate in the long term but also compare what could have been if you started earlier.

  • Playing Safe

There is a chance of sounding counterintuitive as most investors often opt for SIPs to avoid the risk associated with equities. Having said that, if you wish to get the most of the SIP investment, it may be a good idea to be at least a moderate risk-taker and to not just stick to your safety of debt funds and index.

Given the long time frame of SIP plans, most intermediate investors can very well afford to be a little aggressive in terms of the strategy.

  • Lack of Discipline

One of the most common mistakes that investors make with starting a SIP plan is not being disciplined. In simpler words, although most begin with great enthusiasm, within just a matter of a few years, they tend to become too lax on their payments which eventually stop. 

This is why it is a golden rule of being disciplined throughout the duration of the investment. This means, once you start with a SIP, it must be made sure that you stick to it until it’s completed for full rewards, no in-between. Automating your payments by opting for auto-debit may further help you stick to your goals.

  • Getting Swayed by the Market 

There are many investors who tend to get swayed by the movements of the market and then begin to time the SIPs as per the ebb and flow of the market. Therefore, when the market is low, the investors try to increase the SIPs and vice-versa.

What is most often forgotten is that the SIPs are supposed to relieve an investor from the worries of the market’s ups and downs and not the other way around. A SIP investor must always be steady with the payments regardless of the shift in the market to take advantage of the returns.

  • Unclear Financial Goal

Although this seems to be quite obvious, there are many investors who begin their investments with no clear goal in mind. When you think of investments, the first thing that must be made sure of is to be absolutely clear of the goal; why are you investing in the funds in the first place? What are you planning on achieving? Having a plan in mind will help you frame the amount you need within a predefined time period for you to reach the desired returns amount.If you are not sure where to begin, a SIP calculator can be a useful tool to calculate SIP as it provides a rough estimate of the returns you could get when parking monthly installments. The calculator does so by calculating the “expected” return on investment and the wealth gain for your monthly SIP investment.

Final Thoughts

SIPs Mutual fund is a great way for new or small investors to invest in the stock markets and gain the best fun returns. Having said that, it is important for the SIP investor to be mindful to avoid the avoidable common mistakes, like choosing a short investing time, using an SIP calculator, being rigid when it comes to payments, getting affected by the market trends, not having a clear goal, etc.

If these mistakes are avoided and the goal, specifically, is well analyzed and studied with the help of a SIP calculator, mutual funds could become a great mode of building long-term wealth. 

FAQs: 5 SIP Investment Mistakes to Avoid

  • What are the common investment mistakes when investing?

Here are the common mistakes that an investor can avoid when investing:

  • Starting Late
  • Playing Safe
  • Lack of discipline 
  • Getting Swayed by the Market 
  • Not clear on the financial goal

To know more, check out the post above.

  • Is SIP investment safe?

    Yes, SIP is the safest method of investing in mutual funds.  When an investor invests in a mutual fund lump sum, as per the market condition, they could end up paying a high mutual fund price. On the other hand, when investing in SIP, you don’t need to worry about the market timing since you invest a small amount each month.

  • What SIPs are not good?

The only way to explain the viability/ relevance of a SIP and to differentiate good from bad is to ascertain the fund’s historical performance. If a SIP in a mutual fund has not statistically performed well,  it is unlikely that the amount you invest in it will do well. Since mutual fund investments are subject to market risks, if the market of your investment fund is weak, it is automatically unlikely that your equity mutual fund investments will do well.

Interesting Related Article: “What is responsible investment?