Mutual fund SIP investment is fast gaining acceptance among investors, especially among youth who are in the nascent phase of their career. Reason for such rising acceptance of mutual fund SIP is its feature of developing whopping maturity amount with small monthly investment in long-term. However, due to the lack of product knowledge, sometimes an investor commits some mistakes that contain him or her from making big money.
Here we list out common mutual fund SIP mistakes that one needs to avoid:
1] NAV vs past performance: It has been found that a mutual fund investor believes that mutual fund SIP with lower NAV (Net Asset Value) has probability of giving higher returns. But, in actual, one needs to look at the past performance of the mutual fund instead of NAV. A mutual fund’s NAV can be low or high for many reasons but a mutual funds’ performance can be good or bad for just one reason — good or bad asset manager. So, one must keep in mind that its asset manager that matters more than the mutual fund’s NAV.
2] Dividend vs growth plan: According to tax and investment experts, growth plans are better than dividend plans. They are of the opinion that dividends are paid from investor’s net AUM. So, opting for a dividend plan over growth plan dents the income of an investor in long-term as the investor misses an opportunity of compounding benefit or tax on tax.
3] Bull vs bear market: It has been found that mutual fund SIP investors stop their monthly SIP payment when the market is bearish. By doing this, they miss the opportunity of getting more NAVs through rupee cost averaging. In fact, in a bearish market, one should look at top-up opportunity with some lump sum amount the investor has at that time. Mutual fund SIP investors need to understand that investment cost is low when the market is bearish and low investment cost leads to higher chances of return. So, in a bull market, one’s investment cost is high leading to low chances of return.
4] Selection of funds: While selecting a plan for mutual fund SIP, an investor is advised to look at the performance of mutual fund for last 5 to 10 years instead of the recent performance in one to two years. They should also check the benchmark equity return in that period. While selecting a plan, looking at mutual funds long-term performance is advisable.
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