SIP Investment Mistakes! How to Overcome Them?

Have you started your investment journey having a goal in mind?

Have you considered investing in instruments that cater to your Financial Goals?

These instruments can range from regular Bank FD to the much fancied Crypto.

Here are the 5 common stages, every investor goes through during their Investment Journey.

Even you as an investor would have financial goals to achieve and start building your investment
portfolio, haven’t you? Let’s read through and find where we exactly are.

Table of Content:

1.) Stage 1 –Preparation.
2.) Stage 2-A good beginning.
3.) Stage 3-Panicking Phase.
4.) Stage 4-Vexation and disappointment.
5.) Stage 5: Reaping the rewards.
6.) What if I lose my capital in SIP Investment?
7.) Did I make a mistake by investing in a Mutual Fund SIP?
8.) When to stop the Mutual Fund SIP?

• Rebalancing
• Requirement for the emergency fund
• Fund level changes

9.) Key Takeaways

Stage 1 –Preparation:

At first, you would have been highly motivated for choosing to invest in SIP. You would think that this decision of yours will do you wonders.

This is the stage where you would spend maximum time deciding the instrument and also the timeframe according to your goal. 

You would have also done extensive research and would have come to a stage where you finalize your instrument and plan your investment journey till the end.

Stage 2-A good beginning:

Now, you would have chosen the right instrument and started your SIP catering to your financial needs. Everything may seem to go well and you might get a small profit/loss depending on the market conditions. 

Now please remember that your investment journey is like a marathon and not a 100m sprint.

Stage 3-Panicking Phase:

Okay, you have been doing your SIP for quite some time now. This is the stage where you as an investor should come up with solutions for the following circumstances that might look to yield you negative returns.

1) What happens if we are hit by a mighty macroeconomic issue?

2) Is it advisable to continue your SIP even during a crisis as Covid hits us?
Now let’s discuss the factors that would provoke you to take a panicking decision regarding your SIP.

• Under these situations the whole economy goes haywire.
• It will have a significant influence on the market, and there is a high probability of you seeing a negative return from your mutual fund SIP investments.
• Your investment portfolio might not seem that promising 

Such drastic changes are very common in the early stages of your SIP journey. The stock market tests your patience before rewarding you.

“Stock market transfers money from impatient to the patient”
— Warren Buffett

Stage 4-Vexation and disappointment.

This is the stage when you start realizing the true potential of SIP investment. 

Your returns may be somewhere between 0-5% and could be less than what you had expected. 

But still just stay invested, because, in the end, you will see wonders happening.

“Rome was not built in a day;

  But they were laying bricks every day.

  Your retirement corpus will not be built in a day;

  You need to invest every month”.

Stage 5: Reaping the rewards.

Kudos. You have made it through all the difficult phases and are ready to soar high. Your CAGR should be somewhere around 10-12% now, but you are sure that this is going to reward you for all your patience and perseverance. 

After all the tantrums you finally end up with your desired CAGR. Don’t you think this journey is worth considering? Let’s discuss the challenges ahead. 

What if I lose my capital in SIP Investment?

Let’s imagine one fine morning you wake up and see a good return on your investment. How do you feel seeing your portfolio in green? Feeling great, isn’t it?. 

But what happens if the exact opposite occurs? How would you react after seeing a drop from + 15 % in green to -30 %? These scenarios can make you go bonkers.

Yes, these things are bound to happen. Whenever there is a huge fall, just think of why you started this journey. What are the end goal and the tenure you had thought of during your planning phase? 

You were well aware that this could happen. So need not worry about the temporary blips and heed the herd mentality. 

The markets are asymmetric and will never go up or down in a straight line. 

As an investor, you should look to seize this opportunity and invest more so that you can average your NAV or stock price. 

Just look at the below image and see for yourself how the markets rebound after a significant fall. 

A study by CRISIL, the premier rating agency in India shows that there is NO SIP giving a 0% return when invested over a long time (~10 Y). Fascinating isn’t it?

Did I make a mistake by investing in a Mutual Fund SIP?

Most Investors get anxious when they are in the early phases of stage 2. The NAV (in the case of a mutual fund) may not have moved much and they may tend to believe that they should have invested in a different asset and that it would have performed well.

It would be illogical to compare the index fund or equity returns to an FD/RD’s returns or small-cap funds with stocks or crypto investment in the initial stages.

So as an investor we should know that each instrument has its own rate of growth. For a long-term goal the short-medium term returns may not be in their favour and thus should not bother you. 

You as an investor should trust the process and keep investing until you approach the final corpus. 

Some SIP investments start to deliver returns only after 6 years. The amount invested in the first 6 years accounts for up to 58% of the total corpus at the end of your tenure. 

Did you know that over a longer term your per day gain in your portfolio may be equal to your one month’s SIP? 

This is the compounding that happens over some time and is possible only when you stay invested for a longer time horizon

When to stop the Mutual Fund SIP?

Now that we have seen why not to stop SIP, what do you think are scenarios when you should stop your SIP? Let’s discuss this.

Rebalancing:

As you progress in your investment journey, you must rebalance the portfolio as per your age and the goal milestones. 

In such cases, you can adjust the portfolio by selling some of your holdings. This will hep you implement to some extent buying low and selling high without looking at the macros.

Requirement for the emergency fund:

In case of emergencies, some investors redeem their funds to tackle adverse situations. This is however not recommended as emergency planning is the first and foremost plan that should have been taken care of.

Fund level changes:

This is a very common problem. Some of the funds you invest may not give a good return or in fact may be in red for a long time. 

In such cases, it is important to study the dynamics of the fund in which you invest and check what has changed since you started investing. This could be a valid reason to terminate your SIP

Key Takeaways 

Investing in SIP is like growing a bamboo tree. During the first year, there is no visible activity that the plant is growing. The second year also shows no growth above ground. 

This is the same for the third and fourth years. Finally, in the fifth year, the Bamboo Tree shoots up an incredible 80 feet. But if you stop watering the plant in the initial stages, the sapling dies. 

The same analogy applies to SIP investing as well. As Charlie Munger says “The first rule of compounding is to never interrupt it unnecessarily”, it is important to provide ample time for your SIP to grow. 

SIP investing is rewarding over a longer time frame and you must be patient enough and focus on the end goal rather than worrying about temporary drawdowns. 

Do you know that 80% of investors end up destroying their wealth in the market and only 20% end up successful? 

So, it is for you to decide which side you want to be on. Do you want to be a logical investor who ignores the noises around you?

Or do you want to be an emotional investor who reacts to every issue losing your peace of mind and missing out on the chance of accumulating a good corpus?

To enhance your knowledge on investment we would recommend you to watch this video:

What is a Systematic Investment Plan (SIP)? – Watch here

If you have any comments or questions, write them in the comment box below.

Or are you interested in creating a Comprehensive Financial Plan for your financial goals?

Skip the queue by registering for your 30 Minute FREE Financial Plan Consultation. Click the ‘Book Now’ button below.