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6 SIP Mistakes

6 Mistakes to Avoid when Investing Through SIP in Mutual Funds

  • Date : February 05,2024

In the last decade, the SIP in mutual funds has gained a lot of traction among investors in India. SIP contribution in mutual funds reached Rs. 1,83,741 crore in the year 2023, witnessing a 22.95% increase from the previous year’s contribution (Source: AMFI). SIPs allow investors to invest a small pre-determined amount into a mutual fund scheme at regular intervals. SIPs harness the power of compounding and can turn small investments into sizeable funds over a long period of time. Moreover, the benefit of rupee-cost averaging mitigates the market volatility and allows investors to average out their cost of investment. 

SIPs are highly flexible, accessible, and affordable investment avenues. One can even start an SIP with a small amount of just Rs. 100. This has made it a beloved investment avenue among investors, especially retail investors. While SIPs offer a great way to fulfil long-term financial needs, there are certain mistakes that investors generally make. Read this blog to discover the common mistakes investors generally make and how one can avoid them.
 

6 SIP Mistakes to Avoid

  1. Not setting a financial destination- Just like a traveller would get lost without a final destination, an investor also needs a final destination to fulfil his financial needs. Without a destination, an investor would not be able to build a roadmap to fulfil his financial needs. All investors are unique and may have diverse financial needs. It is important to set a different SIP for each of these financial needs. 
     
  2. Not starting early - SIPs in mutual funds should be started as early as possible. The power of compounding can convert even small amounts into a good, substantial fund over time. The longer your hard-earned money remains invested, the more it will benefit from the power of compounding. Hence, starting early can maximise your growth potential. 

    Let's look at this with the help of an example. If you had started an SIP in mutual funds of Rs 10,000, 25 years ago, then its value today would have been Rs 2,77,59,841, an XIRR of 15.06%. However, if you had started an SIP in mutual funds of Rs 10,000, 20 years ago, then its value today would have been Rs 1,17,13,852, an XIRR of 15.06% (Source - Ace MF. Assumptions: Returns of Sensex TRI, SIP interval 10th of each month, Period from Jan 1999 to Dec 2023). 
     
  3. Not topping up your SIP - Inflation gradually erodes the value of your money, hence affecting your purchasing power. If you do not increase your investment amount each year, it essentially means that you are investing less with each passing year. To counteract the impact of inflation and maintain the effectiveness of your investment, it is important to top up your investment amount periodically. 

    If you had started a monthly SIP of Rs 10,000 in Sensex TRI 25 years ago, then its value today would have been Rs 2,77,59,841. But, the same SIP with a yearly top-up of Rs 1,000 would accumulate Rs 4,34,46,879 in a span of 25 years. (Source - Ace MF. Assumptions: Returns of Sensex TRI, SIP interval 10th of each month, the period from Jan 1999 to Dec 2023)
     
  4. Letting your behavioural biases take control - Often, investors succumb to their emotions like greed and fear, driving them to make impulsive decisions. Attempting to time the market based on such emotions not only poses the fear of losses but may also result in missed opportunities. Investors must realise that timing the market is not possible rather they should cultivate patience and stay invested until their financial needs are fulfilled. 
     
  5. Withdrawing from your SIP - SIPs are done to fulfil specific financial needs. But if you withdraw from the SIP, you may not be able to fulfil your financial needs in a timely manner. To fulfil your financial needs seamlessly, it is important to stay invested without making any withdrawals before your needs are fulfilled. . If you had started an SIP in mutual funds of Rs 10,000, 25 years ago, then its value today would have been Rs 2,77,59,841, an XIRR of 15.06%. However, if you withdraw 50% of the corpus at the end of 10 years from the same mutual fund SIP investment, then you would have built a fund of just Rs. 1,67,30,369 with XIRR 11.90%.
     
  6. Stopping your SIP - Terminating your SIP during times of market volatility may lead to significant losses and can delay the fulfilment of your financial needs. Discontinuing your SIP prematurely will rob your investment of the inherent benefits of compounding and rupee-cost averaging, leaving your financial needs unfulfilled. 

    If you had started an SIP of Rs 10,000, 25 years ago, then you could have built a fund of Rs 2,77,59,841, an XIRR of 15.06%. However, if you had stopped this SIP in 10 years, you would have built a fund of just Rs 24,05,399 and missed out on gains of Rs 2,53,54,442. (Source - Ace MF. Assumptions: Returns of Sensex TRI, SIP interval 10th of each month, the period from Jan 1999 to Dec 2023)
     

Avoiding These Mistakes

To navigate through your investment journey and steer clear of these mistakes, investors can seek the guidance of a certified mutual fund distributor. Opting for the guidance of an MFD ensures prudent decision-making and a successful investment journey. A distributor can understand your financial needs and risk profile, provide you with tailored guidance, and handhold you throughout your mutual fund investment journey. For a smooth investment journey with the best results, get the guidance of an MFD now!

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