Five SIP mistakes you must avoid at all costs

Mutual fund investments through the Systematic Investment Plan (SIP) route have become increasingly popular. This is because SIP investments offer several benefits ranging from accessibility and flexibility to compounding and rupee-cost averaging.
However, you can make the most of these SIP benefits only if you avoid certain common mistakes. Here are five of the most common SIP mistakes that you should steer clear of.

1. Choosing an amount that is too high

SIPs are a monthly commitment (or weekly, quarterly, etc., depending on your choice). This means if you select a SIP amount that is excessive, you may struggle to invest it in the future. Hence, when selecting the SIP amount, you should consider not only your current financial situation but also that in the near future.

For instance, you decide to start a SIP when you have no debt, but two months later you avail a car loan and now have to pay the Equated Monthly Instalments (EMIs). In this case, it may become difficult for you to manage your car loan EMI along with your SIPs. For this reason, you would do well to contemplate your financial moves over the next few months to a year when setting the SIP amount and set an amount that you can manage comfortably along with your other monthly obligations.

2. Continuing SIPs only for a short period

SIPs, especially those in equity mutual funds, are the most beneficial when you continue them for a long period. This is because you benefit from the power of compounding, and it is only after a few years that your returns may start to form a greater percentage than your investment in your corpus.

Moreover, equity mutual funds are volatile, as are all equity investments. SIPs may allow you to hedge against market volatility through rupee-cost averaging. However, this strategy, too, may be the most effective when your SIPs continue over the long term.

3. Stopping SIPs during market volatility

When there is a market downturn, markets are bearish, or there is significant economic uncertainty, it may feel counterintuitive to continue your SIP investments in equity funds. However, you should do just that.

Stopping your SIPs can be a mistake because of the way they are structured. Over the long term, SIPs may help to iron out short-term market fluctuations and average out your investment cost. Unlike lumpsum investments in mutual funds, you need not necessarily have to worry about timing the market or stopping your investment when the markets take a hit.

4. Not setting specific goals

SIP mutual fund investments are one of the best investment options for goal-based investing. Before you even start your SIP investment, it is important to set specific goals. Each of your SIPs should be linked to a defined goal. For instance, you may start an SIP in an equity fund to complete your goal of saving for a down payment on a house.

Setting specific goals when investing in SIP mutual funds helps you understand what type of mutual fund to invest in, for how long, and exactly how. You can also use an online SIP calculator to figure these things out in the initial financial planning stage before making any investment.

5. Frequency of reviewing SIPs

It is crucial to regularly review the performance of your SIP mutual fund investments. However, you should not do it too soon or too late. On the one hand, reviewing the performance of your fund every few days would be unnecessary, and it will not yield any useful information. Contrarily, it may just increase your worries owing to daily market fluctuations.

On the other hand, not reviewing your SIPs for years may not work because you will not be aware whether your SIPs and goals are still aligned. Ideally, you should check the performance of your SIP investments once a year, and if a specific investment has been underperforming consistently for about two years, you should consider exiting it.

Wrapping up

If you invest in mutual funds through the SIP route in a well-planned way, your investment portfolio can benefit greatly over the long term. You simply need to ensure avoiding these common SIP mistakes so that you can achieve your financial goals seamlessly in the desired timeline.

Some other SIP mistakes to watch out for include starting too late, choosing dividend plans instead of growth plans, opting for an amount that is too low, and not maintaining the discipline required. If you have made some of these mistakes in the past or are currently making them, it is alright. Investing is a journey, and it is never too late to change your approach once you know better.

Source: Axismf Research

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to `Rs.1 lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Ltd. is not liable or responsible for any loss or shortfall resulting from the operation of the scheme

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.