Last Updated on June 25, 2019 by Gopal Gidwani

Systematic Investment Plans (SIPs) have become a popular way to invest in mutual funds over the past few years. Their surging popularity is a result of the benefits they provide to mutual fund investors. For example, they help instill discipline in investors by forcing them to set aside a pre-determined amount towards investment in chosen funds. Their chief benefit is that of rupee cost averaging, which, assisted by investment discipline, can results into a substantial corpus as the investment cycle of an investor ends.

Because of a disciplined investment approach and due to rupee cost averaging, the power of compounding gets a good opportunity to help investors create wealth in the long term. Apart from these features, SIPs are convenient, easy to set up, and flexible – all aspects which make them popular.

But even after all these benefits, it does not mean that SIPs will continue to work positively even if they are used incorrectly. In this article, we will see 5 errors that investors should avoid committing because of which SIPs may not yield desired results.

1) Choosing an unsuitable fund
An SIP cannot be expected to do wonders to one’s portfolio if the fund chosen by the investor is not right for him. There is no fixed list of the right or wrong funds; a fund is a good or bad choice for an investor based on his objective, life stage, and risk appetite, among other factors. Hence, if a young investor with a small but sustainable investment amount available to him every month, and with a desire to grow his wealth, chooses to invest in a hybrid fund or a government bond fund, would not find SIPs beneficial. Given his profile and investment objective, he should focus on equity funds, and growth option in those funds. A similar case can be made for people who need to be conservative but end up investing in aggressive funds.

Investors should remember that SIP is just a mode of investment and cannot be held responsible for underperformance of a fund. Choosing a bad fund has more severe implications than a market downturn, and an SIP is not responsible for the choice of fund.

An investor should do his research, or seek professional help, in order to choose the right fund based on the aforementioned and other factors. After taking professional help, you can use SIP calculators to choose the fund that you want to invest in, the amount and the duration of investment. The result will show you the returns that you will earn.

Example: If you visit the Reliance or HDFC SIP calculator pages, you will see that they allow you to choose the fund types as well. This helps you understand which fund type is best for you and can give you returns that suit your goal.

2) An improper investment amount can be disastrous
While setting up an SIP, investors need to choose their periodic investment amount which is deducted from their bank account and invested into the chosen mutual fund. They can also choose the date on which this transaction happens. Similar to choosing the right fund, choosing the right SIP amount is crucial for it to work well. You can take help of calculators to decide the amount that needs to be invested in an SIP. There are calculators available online which are specific to the bank or company you want to invest in.

Example: Companies / Banks like L&T / HDFC provide you L&T or HDFC SIP calculator on their website that can be used to determine the right amount to invest.

If an investor chooses too high an amount for the SIP, he is opening the possibility of having to stop the SIP abruptly if other demands on his money arise. The key element of SIP investing is consistency. Increasing the amount invested via an SIP as one’s salary increases is a wise move, but opting for too high an amount upfront, without taking into consideration one’s regular expenses and accounting for some expected ones, would be underwhelming to the investors, leaving an impression that the SIP mechanism does not work.

The other option is equally as bad. If an investor chooses too low an amount via the SIP mode, he reduces the chances of growing his overall corpus (principal + capital gains and dividends) to a much higher level than otherwise. This mistake is usually committed by new investors with the underlying thought being that they want to first test whether SIPs work or not. As we have seen in the previous point, SIPs do not determine fund performance, the fund management team’s efficiency does. A good fund can be exceptionally rewarding in the long run but investing small amounts will only yield a small corpus.

Thus, choosing the right SIP amount is as important as choosing the right fund to invest in. Online investment calculators, or professionals who assist in choosing the right funds, can help in opting for the right SIP amount.

3) Opting for SIPs only for short periods
The SIP mechanism is designed to deliver returns in the long term. Investors who expect to use the mechanism only in the short term and make sizable gains out of it are using it in the wrong way. During good times, well managed funds may post great performance, but sizable outperformance in short period like 1 or 2 years is not possible; this is especially true if market movement is sideways or indices are falling.

Downward or sideways movement in financial markets is a natural phenomenon and is par for the course. But some investors, who have pre-decided a short investment via SIPs, would liquidate their holdings and step away. By doing so, they may be making the biggest investment mistake of their life.

The power of compounding, a key feature of SIPs, works well only over long periods. Mutual funds are not vehicles to make a quick buck. Shorter tenures also mean that rupee cost averaging will not yield optimal results. You have to stick for a long duration to gain better returns over the period. One way to understand the amount of returns you may earn with respect to the duration is by using an online SIP calculator.

Example: If you are investing in HDFC mutual funds, you can use the HDFC SIP calculator provided by the bank to understand the returns you earn when you hold the investment for short period and compare it with long-term returns. The results will show how holding the investment for a longer time ends up giving you higher returns than short-term investment.

Thus, for SIPs to be beneficial, investors should be patient and give the mechanism and the markets time to display their results.

4) Abruptly stopping an SIP
Investors tend to stop their SIP investment when market indices start declining. This is especially true if they expect markets to fall further. But this is where they are committing an error.

This is actually the time they can accumulate more units of the same fund for the same SIP amount. This is because of rupee cost averaging which allows them to accumulate more units because the NAV of funds decline with the market. This also helps them reduce the cost of their investments.

By staying invested during market downturns, investors would be able to gather enough units. This will benefit them greatly once the market starts rising again. And all those additional units they were able to amass will become a great asset when indices the market starts rising again.

5) Failing to renew an SIP
SIPs make mutual fund investment very convenient. But that does not mean they don’t need to be reviewed and renewed. Though fund managers are doing the hard work behind the scenes to make an investor’s money grow, investors need to ensure that they continue with the SIP so that their investment can reward them in the long term.

Investors should review the underlying funds and their relevance to their investment objective from time to time. Simultaneously, they should ensure to renew their SIP so that the benefits of the mechanism do not stop.