Mutual Funds Investment: 5 mistakes you should avoid while starting SIP
Ignorant of the return limit, lack of investment discipline, diversification of investment, etc. are some common mistakes that a SIP investor has been found committing.
Mutual Funds Investment: Systematic Investment Plan or SIP is one of the most preferred investment options for retail investors. It is equally popular among the lower income group as well as higher income group as and usually gives returns around 12 per cent to 16 per cent, depending upon the scheme an investor chooses. However, every investment has a rule so does SIP. And, if these rules are not followed you might end up hurting your returns. Being ignorant of the return limit and remaining tight-fisted with investment return, investment discipline like regular investment without putting an eye on the market movement, allocation of funds or diversification of investment, etc. are some common mistakes that a SIP investor has been found committing. If such mistakes are contained and controlled, one can enhance his or her investment return fortunes, say experts.
Here are some major mistakes that investment experts advise them to avoid while investing:
1] Know the limit of return
Most investors remember the upper limit of return, not the lower limit. For example, in large-cap mutual funds or SIP, one can expect around 11-13 per cent return, which completely depends upon the market performance. Investors tend to forget the lower lower limit of 11 per cent. Hence, when they look at their portfolio, they are disappointed and stop investing in that fund, which leads to loss of compounding gains that come automatically in long-term investment.
See Zee Business video below:
Elaborating upon the average returns in SIP or mutual funds SEBI registered Jitendra Solanki told Zee Business, "On an average, a large-cap, small-cap or mid-cap fund would yield around 11-16 per cent return, which is subject to market risk. If the market has performed better, your return would be better. Most importantly, an investor must know that SIP is not an investment, it's an option."
2] Lack of investment discipline
Generally, people look at the markets forgetting that SIP is like buying the NAV, so it doesn't matter what way the market is going because it affects your previous investment, not the current one. So, don't stop your SIP if the market is going southward and enhance your investment only because the market is going northward.
"Doing investment on a regular basis in SIP is the must if an investor wants to enhance his or her investment return fortunes," said Solanki.
3] Lack of diversification
It has been found that an investor would put his or her entire fund in one option that leads to disaster in case the option fails to perform. So, it is advised that one should diversify money in small-cap, mid-cap and large-cap funds so that they can get the maximum of their input.
Speaking on the benefit of diversification Kartik Jhaveri, Director — Wealth Management at Transcent Consultants said, "Diversification of the total fund allocation is the must. One can diversify his or her portfolio into the large-cap, mid-cap and small-cap funds so that if one option fails to give a better return, he or she can get better returns from other options."
4] Diversification versus duplication of funds
Duplication of the fund in the name if diversifying their portfolio is the common mistake that an investor commits while doing SIP. Getting more than one fund in large-cap, mid-cap and small-cap is not a wise option. Diversification means allocating funds in large-cap, mid-cap and small-cap funds only.
5] Lack of flexibility
It has been found that investors over commit towards their investment without sensing that time won't remain the same throughout life. So, one must plan for the emergency expenditures coming in, or job loss or no salary hike due to some bad performance by the company he or she is associated with. So, one requires cushioning while making an investment plan.
Speaking on the flexibility required while making an investment plan Jitendra Solanki said, "One can invest around 15 per cent of his or her net income. But, it should be in long-term perspective as long-term investment gives compounding benefits that enhance the fortunes of return."
So, if an investor avoids the above-mentioned mistakes while investing in SIP, he or she can maximise its SIP returns, say experts.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.