Common Mistakes to Avoid in SIP Investing in 2024

A systematic investment plan (SIP) is a strategy that involves investing a fixed sum periodically, at regular intervals, in mutual funds. The frequency of investment can be monthly or quarterly. Instead of investing a lump sum amount, you can invest small sums of money, often starting at ₹100, in the mutual fund of your choice. This allows you to tide over short-term market volatility, benefit from rupee cost averaging and tap into the power of compounding over the long term. 

Investing via a systematic investment plan can be a smart way to build wealth over time, but it’s important to be aware of common pitfalls before you start a SIP. 

Common SIP Investment Mistakes to Avoid 

Starting a systematic investment plan is easy and quick. Nevertheless, it takes a significant amount of planning to align your SIPs with your financial goals. Many investors often overlook various aspects of this process and suffer from the consequences of costly SIP investment mistakes. 

By understanding what these pitfalls are, you can steer clear of them. So, here are some such common mistakes you need to avoid:

Mistake 1: Delaying SIP Investments

The earlier you start investing in SIPs, the more time your money has to grow, thanks to the power of compounding. Unfortunately, many interested investors delay their SIP investments and wait for the ‘right time’ or more favourable market conditions. Timing the market, however, is notoriously difficult and often counterproductive. What’s more, delaying SIP investments can result in substantial opportunity costs. 

Starting a SIP early in life can lead to a larger corpus over time compared to starting later with a higher amount. The benefits of compounding are maximised over a longer investment horizon, so delaying your investments can significantly reduce the potential returns. 

Mistake 2: Not Defining Investment Goals

Another common mistake in SIP investing is not having clear investment goals. The goals could include short-term or medium-term goals like saving up for a down payment and repaying your debts or long-term goals like saving for retirement or funding your child’s education. If you do not have a clearly defined milestone or objective, you cannot utilise your investments optimally. 

Without a specific target, it’s hard to determine the right amount to invest, the type of funds to choose, or the duration of the investment. Clear goals help in selecting the right SIP in terms of risk, tenure and returns. For example, SIPs in equity funds may be better suited for long-term goals, whereas debt funds may be suitable for short-term or income goals. 

Mistake 3: Ignoring the Importance of Asset Allocation

Asset allocation is the process of diversifying your investments across various asset classes like equity, debt, money market instruments, gold, etc. Optimal asset allocation helps balance risk and return easily. However, many investors make the costly mistake of putting all their money into a single asset class or fund type. This can expose them to higher risk if that particular market segment underperforms. 

A balanced portfolio that is tailored to your risk appetite and investment horizon makes it easier to navigate market volatility. For instance, if you can afford to take more risks, you can focus on SIPs in equity funds. Alternatively, if you are closer to retirement, you could consider more debt allocations.

Mistake 4: Pausing SIPs in Bearish Markets

Another mistake that SIP investors tend to make is halting their SIPs during market downturns. This decision often stems from fear and a misunderstanding of how SIPs work. However, continuing SIPs during market lows can be advantageous. This strategy allows you to tap into the benefit of rupee cost averaging and allows you to purchase more units when prices are low. 

So, if you pause your SIP investments in a falling market, you lose out on the chance to buy more units at lower prices and benefit from the eventual market recovery. As a long-term investor, you should view market lows as opportunities rather than threats and consistently invest via SIPs during all market phases.

Mistake 5: Relying Only on Past Performance

If you tend to select mutual funds for your SIP based solely on past performance, you may be making a grave mistake. This approach is flawed because past performance alone is not a reliable indicator of future results. A fund’s historical performance can be influenced by numerous factors, including market conditions, fund management, and sector-specific trends, which may not persist. 

Instead, you should consider a variety of factors when selecting a fund, like the fund manager’s expertise, the fund’s investment strategy, consistency of performance across different market cycles, and how well the fund aligns with your investment goals and risk tolerance. 

Mistake 6: Failing to Increase SIP Amounts Over Time 

Inflation is a crucial factor often ignored in SIP investing. A fixed SIP amount might seem adequate today, but over time, inflation reduces the purchasing power of your money. If you fail to increase your SIP amount periodically, it may delay or prevent you from meeting your long-term financial goals. So, as your income grows, ensure that you proportionately increase your SIP investments. This can help counteract the effects of inflation. 

This strategy, known as a step-up SIP, compounds the benefits of investing via a systematic investment plan. It helps build a larger corpus over time and also aligns your investments with the increase in your financial capacity. Regularly increasing your SIP amounts also ensures that your investments grow in line with your increasing financial goals and needs. 

Mistake 7: Ignoring Costs and Fees

The impact of costs and fees on investment returns is often underestimated in SIP investing. These costs, like expense ratios, entry or exit loads and administrative fees, can significantly reduce the overall returns from your investments over time. A fund with a high expense ratio will need to perform significantly better than a lower-cost fund just to break even. So, you should carefully consider these costs when choosing funds for your SIPs. 

Over time, even a small difference in fees can add up and lead to a substantial impact on your total investment corpus. Thus, a mutual fund with lower overall costs that meets your investment objectives and risk profile might be a more efficient choice for your SIP than a different fund that is more expensive to invest in.

Conclusion

These are common mistakes that many investors tend to make in the process of investing via a systematic investment plan. Now that you are aware of the potential pitfalls, you can take the steps necessary to steer clear of these mistakes. If you still require some assistance to draw up a reliable SIP investment plan, you can approach a financial advisor for some expert guidance. But first, open a demat account with Angel One from the comfort of your home to enjoy a seamless investing experience.

Disclaimer: The article is for educational purposes only. Investment in securities is subject to market risk. Read all related documents carefully before investing.