SIPs have been a huge driver of Mutual fund investments in India in the last few years. According to the latest AMFI data, Indian Mutual Funds have currently about 2.74 crore (27.4 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes.
Moreover, the data shows that the MF industry had added, on an average, 9.32 lacs SIP accounts each month during the FY 2019-20, with an average SIP size of about ₹3,000 per SIP account.
You can easily find out the correct investment amount every month by using a mutual fund sip calculator.
With the ease of investment, low investment thresholds and the automated nature, such popularity of the product is expected.
However, SIPs are not entirely fool proof and there are some common mistakes one should avoid when investing through them.
1. Not increasing your SIP amount periodically
SIPs are a great way to get into the habit of saving and investing since
they can be started with very small amounts.
However, the power of compounding can only do much if you stick to these
amounts for a long time. Once you are confident about your investments, you
should periodically increase your SIP amount.
Generally the percentage increase should be in line with the increase in your income.
Finding the right amount to invest when you know your investment horizon is easy with the help of a MF SIP calculator.
2. Investing with a short-term view
It is generally advised that Mutual Fund investments should be for generating wealth in the long run. A common mistake that a lot of investors make is redeeming their investments either because their portfolio in the short term has given them negative returns or because they’ve received a decent short term return and want to book profits. Neither of these approaches are efficient since you are reducing both the time and the amount in your portfolio thereby hampering its ability to harness the power of compounding.
Remember. Focus on the ‘Time in the Market, Not Timing the Market’.
3. Choosing Dividend over Growth
The power of SIP lies in the benefit of compounding. There have been cases where investors often opt for the dividend payout option. What this means is that the fund house will issue you dividends, in proportion to the units you own whether it be periodic or on an ‘as and when’ basis. This will end up in your bank account. While on the outset, it may seem like a good thing this severely affects the compounding effect of your investments.
To pay out dividends a fund has to sell some of its securities and convert it into cash. Therefore, dividends is not an additional income but just a withdrawal from your own money. Growth may be a better option for you as compared to Dividend, unless you are in need of the secondary source of income.
Furthermore Growth Funds are more tax efficient than dividend schemes.
4. Abruptly stopping SIP investments
As stated earlier, Mutual Funds should be invested in for the long term. However, most investors tend to lose patience when their portfolio is in the red and stop future SIP investments.
On the contrary, this is the perfect time to buy more. A bear market is the perfect opportunity to buy units at a lower price. A sort of a discount if you will. Some savvy investors even tend to increase their SIP amounts in these periods. SIPs are to an extent volatile resistant since when the markets go up your portfolio sees an uptick and when the market takes a downward turn, you get more units for the same amount.
Remember to use a mutual sip calculator to quickly calculate how much you need to invest every month to reach a certain goal.