Mutual Funds

Mistakes People Make While Investing in SIPs

Created on 12 Oct 2023

Wraps up in 6 Min

Read by 1.4k people

Updated on 13 Oct 2023

Let's visualise a full-grown tree. 🌳 Imagine it standing tall and proud, its branches laden with fruits and leaves. The climate, soil, water, and sunlight; all have played a role in transforming a tiny seedling into a thriving tree.

Investing in a Systematic Investment Portfolio (SIP) is like growing a tree. It takes time, patience, and the right conditions. But if you're willing to put in the effort, you can reap the rewards of a healthy and prosperous financial future.

They can be considered as the unrivalled option most beginner investors choose as the first investment. By investing a fixed amount of money in regular intervals, one can create a large corpus in the near future.
Told you! SIPs are pretty identical to trees, with the only difference being investors who plant (invest) get to enjoy the fruits (returns) of the tree.    

They are a simple way to build wealth, even for people with little or no financial knowledge. But despite their simplicity, not many people are able to take advantage of the high returns that SIPs offer.
Let’s discuss this scenario first, and then we will jump on to the blunders people commit while investing in SIP.

Is SIP a Complex Investment Option?

Take a look at this graph portraying the rise of inflows in mutual fund SIPs over the last two years. 📈

Source: Association of Mutual Funds in India (AMFI)

As the graph above shows, mutual funds SIP inflows hit the record-breaking ₹14,000 crore mark in March 2023. Despite this achievement, many have concerns, why is this?

One reason is that people are often intimidated by the idea of investing. People believe they need to be experts in the financial markets to invest successfully. But the truth is SIPs are designed to make investing easy and accessible for everyone.

Another reason is that people don't understand how SIPs harness the power of Compounding and Rupee Cost Averaging. Compounding is when your earnings start generating their own earnings, whereas Rupee Cost Averaging is averaging out the cost at which you buy mutual fund units. Both these factors make SIPs a better investment option for risk management.

Still, there are some prejudices surrounding SIPs, which lead to people making silly mistakes, affecting their financial goals in the long term.

Let's uncover the mistakes most investors make and are making this very second while investing in SIPs.

Mistakes to Avoid in SIP Investing

The blunders discussed in this article are quite similar to what we do in our daily lives. The answer to avoid them is also available in front of us. All one needs to do is adapt and learn. So, let’s start this class! 📖

1. Never Investing Enough

All the people who don't know when to stop eating that extra slice of cake or sipping too much caffeine, raise your hands. 🙋‍♂️

Dealing with the concept of "what's enough" is a problem we face almost daily. This has the tendency to reflect in our investing habits as well. Investing too little or too much is the most common mistake investors make when dealing with SIPs.

Investing a smaller amount could interfere with your financial goals. On the other hand, pooling in lots of money could cause liquidity issues in times of need. So, you must find that "just right" amount for your SIP funds.

How to do that? Well…

You can set a fixed investment sum by subtracting it from the salary you earn monthly with your expenses. In official terms, this technique is known as the 50-30-20 Rule.

Think of it like this: how much of your salary could you live without every month? It could be ₹500 or ₹5,000, which is how much you should invest in SIPs.

Remember that the more you invest, the higher the return you will receive, contributing to generating a large corpus in the long run.

2. Failure in Diversifying the Portfolio

“The beauty of diversification is it’s about as close as you can get to a free lunch in investing.”

This quote from a successful American writer and equity analyst “Barry Ritholtz” explains the importance of diversification in relatable words. We all love getting free lunches as no one goes hungry on those days, and the dish chosen is something everyone eats. The same logic applies to portfolio diversification.

Including different schemes and funds gives your portfolio a positive opportunity to grow in any scenario. Hence, the result would be in your favour even if one fund performs poorly.

Portfolio diversification protects investors’ investments and helps maintain the balance. That’s why it’s important to include large, mid and small-cap companies from various sectors in your SIP portfolio.

3. Not Including the Step-Up Option

Inflation is like that daily Kirana store customer who purchases items on credit but is still considered the biggest contributor. Inflation is a regular phenomenon that adversely affects a nation's economy but could also lead to a profitable venture for asset classes like gold.

Interested in gold investments? We have the perfect classification for you! Go through this article and learn how to receive the best returns by investing in gold.

But remember, inflation is not a friend of SIP investments and could stop you from generating a large corpus if you don't step up. I mean this in a literal sense.

Step-Up SIP, also known as Top-Up SIP, refers to investors periodically increasing the predetermined amount of SIPs' investments. Suppose an investor selected ₹2,000 as the fixed deduction amount to be invested in SIP monthly. With Step-Up, they can increase the amount after a particular period, say one year, to ₹3,000.

This would help the investor receive a high return and contribute to generating a large corpus over time. So, if you wish to achieve your financial goals early on, 👇

4. Not Keeping an Eye on the Market

Do you know the similarity between a milk pot on the stovetop to boil and the stock market? Both tend to spill (or fall) as soon as the watcher (investor) averts their eyes.

The first rule of investing in the stock market is keeping a vigilant eye on it. You must be aware of what’s going on in the market, economic conditions, interest rates, and other factors. These factors directly affect the funds you invest in and could lead to negative returns if ignored or missed.

This rule applies strongly to investors whose SIP portfolio includes equity funds. Debt funds are less risky than equity funds as they include fixed-income securities, government bonds, etc., whereas equity funds are directly affected by the stock market. Hence, they fluctuate more and can have the possibility of generating higher or negative returns.
So, make sure to check your portfolio alongside keeping an eye on the stock market from time to time.

5. Irregular Investments

As is evident from the full form, SIP means investing systematically. This could be equated to maintaining a disciplined lifestyle, which many of us find difficult to accomplish.

If you start investing in SIPs every month, then make sure to do so diligently. Set the automated deduction feature and remember to keep the fixed money aside without fail.

And don’t stop investing in SIPs till the end of your tenure. By doing this, you are guaranteed to achieve the fixed goals you aspire to in due time.

6. Not Identifying One’s Risk Appetite

Imagine two people eating a meal. One person eats a small meal every two hours, while the other eats big meals three times a day. Both are getting their hunger satisfied, but the method is different.

Just like eating habits, people have different risk appetites for investing. Some people can tolerate a lot of risk, so they can invest in equity funds. Other people don't have a backup corpus to deal with tough times, so they should try to maximise more on debt funds.

Not understanding how much risk your bank account can handle is the biggest obstacle to your financial goals. So, think carefully about how much risk you can take, and then adjust your portfolio accordingly. After all, you don't want to get financial indigestion.

The Bottom Line

Investing is a difficult feat and often feels like it's not your cup of tea. But that is far from the truth. Everyone has the potential to build a comfortable future and achieve their dreams through investing. The key is to find the right approach.
SIPs are a great way to invest for beginners and experienced investors alike. They're simple, affordable, and flexible.

So, if you're not investing in SIPs, you're missing out on a big opportunity.

P.S. After all the food references, it's time you and I take a snack break and ponder over our investment plans; shall we?

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Preeti Gupta

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A book-lover who adores everything fictional, Preeti has undertaken the life mission of tasting every flavour available in the pantry. A science student with a Master's in Mass Communication, she now wishes to conquer the Finance world as a writer. With the power invested by the randomly chosen music, she is here to make Finance fun for you.

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