Anyone who has started their mutual fund is well aware of the power of SIP investing. Systematic Investment Plan is a simple and convenient tool that allows retail investors to save and invest fixed sums regularly. This is an effective way to ensure that one can build a long-term corpus and target their life’s important financial goals by investing in mutual funds through SIP. SIP averages out the cost of purchase as it allows investors to buy more units through an investment technique referred to as rupee cost averaging. It can also help generate interest from the interest earned from the principal investment sum via the power of compounding. However, there are a few common mistakes which investors should avoid ensuring that their SIP investments grow throughout their investment tenure.
Here are some of them:
Invest in a fund that has a low NAV
A lot of investors are under the assumption that mutual fund schemes that have a low NAV (Net Asset Value) have the potential to offer more returns and start a monthly SIP in such funds. But what they do not realize is that a fund’s NAV can be determined based on various reasons. A fund’s NAV can be determined based on the market performance of its underlying securities. A mutual fund whose underlying securities perform from time to time, such schemes may be able to perform better than other mutual fund schemes and this can be a driving factor for their NAV to increase. New schemes also have low NAV as compared to funds that have been there for a while and may take time to grow. A fund’s NAV should not be the main reason for investors to start a SIP. Instead, they can look at the scheme’s past performance, look at the management managing the scheme, check if the fund is investing in credible securities, and then make an informed investment decision.
Opting for dividend plans than growth plans
Several retail investors consider dividend plans than growth schemes as they feel that dividends offered by mutual fund schemes can lead to regular income. What such investors do not realize is that these dividends are paid out to them by the fund house from the scheme’s AUM (Asset Under Management). As a result, the NAV of a mutual fund that offers dividends is generally low as its value declines every time it rolls out dividends to its investors. Also, investors who opt for dividend distributing mutual fund schemes have to pay tax dividends are taxed as per the investor’s income slab.
Stopping SIP investments when the markets turn bearish
When the markets turn bearish, a lot of investors stop their SIP investments fearing that they may incur further losses. One thing all investors must understand is that when the markets are bearish, they should not panic and sell their investments. That’s because these investments might already be underperforming in bearish markets and selling them in panic will only lead to losses. They must understand that even if the market is currently underperforming, it will correct itself and deliver in the long run. One can consider bearish markets as an investment opportunity and buy more units by increasing their SIP investment sum.
Expecting the scheme to perform all the time
What new investors feel is that just because their investments are delivering during bullish markets, they should continue generating returns throughout the year. Mutual fund investments do not guarantee returns and their performance is based on how their underlying securities perform in their sectors. Hence, one should not stop investing in a mutual fund scheme in case it underperforms for a few days. They need to remain patient and invest for the long run so that their investments can grow and compound into a wealthy corpus.