Mutual Fund SIP: Avoid these mistakes
Written on Tuesday, October 27, 2015
By Vishwajeet Parashar- Senior VP & Group Head - Marketing, Bajaj Capital Ltd.
Over the time, Systematic Investment Plan (SIP) has emerged as a popular mechanism for investors in Mutual Funds. What has made SIP a prevalent choice is the disciplined approach allowing investors to limit the downside and keep a check on the inconsistency of their returns. When you invest a fixed amount at a set interval, despite of the varied market conditions, you will relish a good return over a period of time. It has often been observed that many investors stop their SIPs at times when market spirals downwards, and I would say this is the BIGGEST of all mistakes. Through this blog we would suggest you few things that needs to be avoided to gain maximum irrespective of the market conditions.
Here are a few mistakes that investors make and how these can be avoided-
Investing aggressively through SIP
Investors often make the mistake of starting a SIP with an amount that they find tough to continue after a while. So, start conservatively and steadily increase the investment to ensure continuity.
Investing for a year at a time
It is common to see investors going for investment through SIPs only for a year or so. The rationale for this approach is to analyze the performance after a year and then take a long-term call. This is not a logical way of evaluating the performance of an asset class like equity and the efficiency of a powerful mechanism like SIP. The right way would be to invest for a minimum period of five to seven years. The longer one follows this process, the more one benefits from ‘averaging’ and the ‘power of compounding’.
I can't lose money if I invest through SIP
‘Rupee Cost Averaging’ doesn’t mean one can’t lose money. While SIPs help get the benefits of ‘averaging’, risks associated with the asset class still remain. However, the impact gets minimized significantly if one continues the process for longer.
Discontinuing SIP in a falling market
The objective of investing through SIPs is to take advantage of market volatility. But many investors stop SIP when they observe a downfall in markets. The key is to continue the process for a committed period of time, irrespective of the market mood.
Opting for dividend option
The power of compounding works in your advantage when you invest for the longer term and allow the gains to remain invested. Withdrawing money at regular intervals would defeat the purpose. Hence, it is suggested that you should go for the growth option.
Investing in aggressive funds at the very beginning
Do not commit the mistake of investing heavily in aggressive funds, such as sector, thematic and mid- or small-cap funds in the beginning, since these funds are more volatile than diversified funds, they will benefit more from ‘averaging’. Investors should remember that to achieve long-term goals, one will need to invest in funds that are diversified and have the potential to perform consistently.
#Mutual fund investments are subject to market risk. Read all scheme documents carefully before investing.