Mistakes to Avoid While Starting an SIP (Systematic Investment Plan) in Mutual Funds
A SIP or Systematic Investment Plan, is considered the easiest and most disciplined option for wealth creation. Simply buying and holding a broadly diversified portfolio of low-cost index funds is simple enough. In this article, we look at some common SIP mistakes and how to avoid them so that your SIP journey will be having a better foundation than most of your competitors.
Let’s explore the biggest possible pitfalls and how to avoid those ones.
1. Starting Without Clear Financial Goals.
One of the biggest mistakes new investors make is starting an SIP without associating it with a particular purpose. Why are you making an investment? Retirement, child education, home down payment, travel, or something else? Without clarity.
- You may not pick the right fund category or risk level.
- It becomes easy to quit midway when markets wobble.
- It is difficult to monitor progress and the evaluation becomes meaningless.
What to do instead.
Use Specific, Measurable, Attainable, Relevant and Timely (SMART) goals. For instance, it could be “I want Rs 25 lakh in 15 years for my child’s higher education.” Once you have that, you can back-calculate your monthly SIP required, risk allocation and fund types.
2. Chasing Past Performance / Popular Funds Blindly.
You spot a fund that gave 40–50% returns last year and jump in; a classic lure. Past performance and the past short stretch do not guarantee the future returns. The markets change, the fund managers change, the sectors come in and out of favour.
Many beginner investors choose funds because.
- It’s trending in media or WhatsApp groups.
- Their friend or relative recommended it.
- It had spectacular returns in the prior year.
Such “rear-view mirror” investing is dangerous.
What to do instead.
- Focus on multi-year performance and not just a one-year return to evaluate coherence.
- Don’t just look at your absolute gains (or losses) but the risk-adjusted metrics.
- Make sure the strategy of the fund aligns with your goals and risk profile (large, flexi, hybrid, etc)
3. Picking the Wrong Option Type (Growth vs Dividend / IDCW).
Some investors opt for the dividend or IDCW option for the assumption that receiving periodic payouts is better. But this can erode your compounding effect.
- The payment of dividends (or IDCW) decreases the fund’s assets. The reason is that a portion of returns gets paid out.
- Taxes can apply to the dividend part, lowering the net gain.
- The growth option can yield the most returns.
ET Money warns about this mistake: choosing dividend or IDCW when not necessary can hurt long-term results.
What to do instead:
Unless you specifically need periodic cash flow, go for Growth option. Let compounding work in your favour.
4. Underestimating the Time Factor — Having Too Short a Tenure
An SIP needs time to deliver exponential gains. Many make the mistake of choosing too short a tenure (3–5 years) expecting big returns. But equity funds, in particular, tend to smooth out over longer periods.
Economic Times and others warn that stopping SIPs too early diminishes the power of compounding.
What to do instead:
- Match tenure with your goal. For long-term goals (10+ years), treat your SIP as a perpetual or long-dated investment.
- Don’t redeem just because markets are volatile; stay focused on the long view.
5. Skipping or Pausing SIPs (Especially During Market Dips)
One of the most damaging habits: pausing or discontinuing SIPs when markets fall. This is exactly when rupee-cost averaging works best: you buy more units for the same sum, reducing your average cost.
Skipping even a few installments can erode significant returns, as ET Money points out.
What to do instead:
- Build a buffer so your SIP installment doesn’t fail due to insufficient funds.
- If cash flow is tight, reduce the SIP amount temporarily—but avoid a full stop.
- Use automated tools or alerts to avoid unintentional misses.
6. Keeping the SIP Amount Static Forever
Many investors make the mistake of keeping their SIP contribution fixed over time—even as their income increases. Over years, inflation and lifestyle upgrades will erode your real returns.
ET Money gives a strong example: increasing your SIP annually can dramatically boost your corpus.
What to do instead:
- Use a Step-up SIP option if your platform allows (automatically increases the amount).
- At least review your SIP amount annually and raise it in line with income growth or inflation (5–10%).
7. Overconcentration / Lack of Diversification
Investing all your SIP in one fund, or only on a sector/theme front, can hike the risk. Secoronal/thematic funds can deliver high returns, however timing them is difficult and dangerous.
Failing to pay attention to asset allocation also forces you into ill-balanced portfolios: that is, when the bull market cuts in, you may be too much in equity and vulnerable for sharp corrections.
What to do instead:
- Diversify over all fund types: for example, large- cap, mid-cap, hybrid, debt etc.
- Define an asset allocation target, say 70% equity and 30% debt, and rebalance at regular intervals.
- Avoid too many overlapping funds in the same sector or style.
8. Ignoring Fund Expenses, Exit Loads, and Tax Implications
Fees matter over the long run. Many investors ignore:
- Expense ratio: even small differences (0.1–0.5%) can compound to large amounts over decades.
- Exit loads / lock-in periods: especially in ELSS (3-year lock-in). Exiting early hurts planning.
- Taxes on gains and dividends: choosing IDCW might attract more tax; capital gains treatment differs based on holding period.
LiveMint warns that ignoring fees and loads is a major oversight.
What to do instead:
- Compare funds of the same category by expense ratio and total costs.
- Use direct plans over regular ones to save on commissions.
- Be aware of tax rules on dividends, short/long-term capital gains, and plan accordingly.
9. Obsessing Over Daily Returns & Market Timing
Some investors compulsively check returns daily, react emotionally to fluctuations, or try to “time the market” (i.e. invest only when they think market is low). But SIPs work best when you stay consistent, not when you try to dance around the market.
PolicyBazaar and HDFC list “timing the market” as a common error.
What to do instead:
- Take a “set-it-and-forget-it” approach for the core portion of your SIP.
- Check performance quarterly or semi-annually—not daily.
- Trust in time in the market, not timing the market.
10. Failing to Review / Rebalance the Portfolio
SIP is not a “fire-and-forget”echanism. Over time, your financial goals, risk appetite, or the performance of your funds might change. Neglecting to review and rebalance is a big mistake.
Example: Suppose equity did very well in recent years, and your portfolio’s allocation drifted from 70% equity / 30% debt to 85% / 15%. This increases your risk. You need to bring it back in line.
What to do instead:
- Review your SIPs, fund performance, and portfolio allocation every 6–12 months.
- Exit underperforming funds (after giving them fair time, say 18–24 months) and reallocate.
- Rebalance your allocation by either switching funds or adjusting future SIPs.
Bonus: Additional Pitfalls & Tips
- Waiting to start SIP at “perfect time” — People wait for right market. This causes lost time. Begin where you can afford.
- Trusting purely influencer or social media advice – Not all tips are vetted. Do your own due diligence or consult licensed professionals.
- Mismatch in the time horizon and nature of Fund — Equities require long-term; debt short-term. Do not put short-term goals in aggressive equity funds.
- Not Plan for liquidity or Emergency fund — Do not invest your entire surplus in SIPs; keep some cash buffer.