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3 SIP Mistakes To Avoid Right Now

Here are three Systematic Investment Plans mistakes to be avoiding right now.

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SIPs (Systematic Investment Plans) in Mutual Funds have picked up some dramatic pace over the past three years, with Rs. 8,000 Crores per month becoming the new normal for SIP inflows. Having said that, there are many investors who started their SIP’s nearly three years back, who are still sitting on flat returns. Since SIP’s, especially equity-oriented ones, are subject to the inevitable vicissitudes of market cycles, behavioural pitfalls can hold you back from optimizing your returns from them. Here are three SIP mistakes to be avoiding right now.

Sticking to Large Cap Funds

It’s quite common for investors, particularly the more risk averse ones, to seek out the relatively safe haven of large cap oriented mutual funds for their SIP’s. If you are one of them, this is likely to work to your detriment in the long run. First, consider the rampant overvaluation within the large cap space per se. Compared to blue chip stocks, small and mid-caps are at much fairer valuations. In fact, the divergences between the NIFTY 50 and the Midcap and Small cap indices are at historical extremes. The Nifty Midcap’s Relative Valuation versus the Nifty 50 has corrected back to 2014 lows, and is ripe for a run up. It would certainly be a wise move to divert most of your long-term SIP’s to small & mid cap funds at this time. However, do bear in mind that the price to pay in exchange for these potentially higher returns, would be a higher degree of volatility! Having said that, the risk-reward seems lucrative at the moment.

Getting frustrated with flat returns

Many investors who migrated to SIP’s from fixed return assets like recurring deposits and PF, tend to misunderstand how SIP’s work. They invest based on attractive sounding past returns ranging from 14% to 16% over 5-10-year SIP investment periods, without realising that these returns are far from linear in nature. In fact, there have been multiple examples in the past where SIP returns were negative for the first two or three years, only to cross double digits on a compound annualised basis within another couple of years! The magic of SIP’s can only be fully realised through complete dispassion, high levels of patience, and uncompromising discipline. If you tend to get frustrated with low returns, or are investing into SIP’s with the expectation of consistent yearly growth, you’re better off stopping your SIP’s and moving your money elsewhere!

Not linking them to your goals

Numerous studies have now proven the importance of not starting your SIP’s in an ad hoc manner, but rather linking them to clearly defined, specific and measurable goals. In fact, anecdotal evidence suggests that random number SIPs (for example: Rs. 3680 per month) tend to continue longer than SIP’s in rounded off figures (such as Rs. 4000). This is most likely because the former was started after a back calculation from a target amount for a specific goal (for example: your child’s education), whereas the latter was started for no particular reason. For best results, prepare a goal map before starting your SIP’s, and track your progress towards those goals closely rather than fixating on short term returns.

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