SIPs or Systematic Investment Plans have become one of the most popular and trusted ways to invest in India. Mutual funds in India have emerged as an easy yet powerful mode of building long-term wealth. They allow people to invest in small amounts regularly and enjoy the power of compounding by generating long-term wealth. SIP investments are extremely beginner-friendly and suitable for people with both long-term and short-term financial goals.
However, there’s still a catch in this. No matter how simple and straightforward SIP investments are, there are many investors who end up making avoidable mistakes that significantly reduce their returns and even discourage them from continuing with their investment plan. If you are a beginner who is looking forward to starting your investment journey by investing in mutual funds, then here are the five most common mistakes that you must avoid in order to get the most out of it.
- Investing Without Goals
One of the biggest mistakes that a beginner might end up making is investing in SIPs without having a clear financial goal. If you do not know whether you’re saving up for your higher education, for a long getaway, or to buy a house, you will not save effectively. An SIP in mutual funds is not just about investment. It is about aligning that investment with your future goals and needs.
- Stopping SIPs Midway
The only factor that makes SIP investments work in the long run is consistency over a long period. However, there are many people who get very impatient when they do not see any significant growth in shorter durations and eventually end up stopping their investments. The truth is, SIPs are designed to help you navigate market volatility. By investing consistently, you buy more units when the market is low and fewer units when it’s high. Think of SIPs as a marathon, not a sprint.
- Ignoring Direct Mutual Fund Investment
The most common type of MF investment that a beginner opts for is the regular ones done through intermediaries or distributors. This option might be the most convenient, but it often comes with a higher expense ratio because distributors tend to earn a certain percentage of commission.
Direct mutual funds, on the other hand, allow you to invest directly with the AMC (Asset Management Company). This cuts out the commission of the distributor and ultimately lowers the expense ratio, which results in better returns in the long run.
- Not Reviewing Mutual Fund Plans Regularly
It is not ideal to go out and start investing in SIP without knowing anything about it, and just forgetting that the investment exists in the first place. Market conditions vary, performance of funds varies, and so can your financial objectives.
You might have selected the mutual fund that performed the best at the time, but nobody can guarantee its performance 5 years from now. Hence, you must regularly review your mutual fund investments in order to make the best out of them.
- Over-Diversifying SIP Investments
While diversification can be very instrumental in maximising investments, over-diversification can lead to a decline in results. Some beginners might start investments and end up getting caught in multiple mutual fund schemes without understanding their overlaps.
SIP in mutual funds is among the wiser methods of beginning your investment path, provided that it is undertaken with sense and reason. With clear objectives, consistency, direct mutual funds, performance review, and non-over-diversification, you will be in a higher position to increase wealth.
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