Investing in mutual funds through an SIP? Here are some key do's and don'ts

Systematic investment plans or SIPs have become a popular way to invest in mutual funds, with most experts agreeing that it is an excellent way to build wealth over time through disciplined investing. However, simply setting up an SIP is not enough. Investors need to follow various steps to build wealth. This includes choosing the right funds, maintaining consistency and understanding the nuances of market behaviour.

Experts also note that for long-term investors, concerns about market valuation at the time of starting an SIP should not be a deterrent, irrespective of the category. “If the investment horizon is 10 years or more, short-term fluctuations will balance out, and long-term growth will remain intact. A well-structured SIP portfolio ensures steady wealth accumulation regardless of market conditions,” said Shweta Rajani, head, mutual funds at Anand Rathi Wealth.

According to monthly data from the Association of Mutual Funds,  SIP contributions surged to an all-time high of Rs 26,459 crore in December 2024 from Rs 25,320 crore in November 2024. Equity mutual fund inflows also grew by 14.3 percent in December 2024 to  Rs 41,136 crore. In November 2024, the flows were Rs 35,927.3.

Here are some of the do’s and don’ts of investing via SIPs.

Start investing early
It is a simple truism that the sooner you start your SIP, the more time your money has to grow through compounding. Even small investments, when given enough time, can accumulate into significant wealth. Rajani explained, “The first step is to understand your SIP and set clear goals. Identify what you are saving for, whether it is a 3-, 5- or 10-year goal, and determine the minimum SIP amount required to reach it. Starting early is always beneficial, as it allows you to take full advantage of compounding.”

Germinate Investment Services’ CEO and founder Santosh Joseph agreed. “Starting early allows you to accumulate a larger amount of principal, which will earn more over time,” he said.

Maintain investing discipline
One of the biggest challenges in SIP investing is staying committed through market ups and downs. Investors often get tempted to stop or adjust their SIPs during downturns or when they feel their returns are not as expected. “Maintaining investing discipline is crucial. While missing an SIP payment occasionally is not a major issue, setting up a perpetual SIP ensures that it continues uninterrupted. Another important practice is to step up your SIP amount every year. Even a small increase of 5 percent annually can significantly improve long-term returns by keeping up with inflation and income growth,” Rajani noted.

Shyam Shankar, fund manager at ithought PMS, said in a post on social media platform X, “Maintaining discipline in a SIP is the most underrated and underappreciated aspect of mutual fund investing.”

Choose growth over dividend
Compounding plays a significant role in wealth creation. Experts suggest that opting for growth plans instead of dividend plans ensures that the returns generated by your investments are reinvested, allowing your wealth to grow at an accelerated pace.

Link SIPs to specific goals
SIPs work best when they are tied to specific financial goals, such as buying a home. This approach ensures that you remain focused and avoid unnecessary withdrawals. “Start by defining your goals, like retirement or education, to help you make investment decisions and stay motivated to keep and continue your SIPs,” said Joseph.

Use correct parameters to select fund
A common mistake investors make is choosing funds based on their returns record alone, without taking into account factors such as long-term consistency or risk profile. “Do not chase or select funds purely based on past performance. Suitability of the fund and long-term track record are essential criteria for selection,” Joseph cautioned.

Do not mis-allocate to wrong funds
Not all funds are suitable for SIP investing. Some funds are highly volatile, making them unsuitable for long-term SIPs. “The SIP may look like a simple way to invest money, ” Shankar explained. “But it is still not as simple as it looks. Firstly, you need to invest in the right funds. Choosing the wrong funds can defeat the very purpose of doing an SIP.” He highlighted the risks of thematic and momentum funds: “Investing in a thematic SIP is far riskier than a flexi-cap or large-cap SIP. Often, a thematic SIP can be disastrous if started closer to a market top in that theme. Doing an SIP in momentum funds can turn disastrous once the momentum breaks down terminally.”

Diversify across market caps and AMCs
Investing in a mix of large-cap, mid-cap and small-cap funds reduces risk and ensures better long-term returns.  Rajani noted, “Instead of focusing only on a single category like large-cap, mid-cap or small-cap, a balanced exposure to all three ensures stability and growth. Long-term goals are better served with diversified funds, as they provide consistency and reduce the risk of missing the right exit point.”

Apart from categories, experts also suggest diversification across asset management companies or AMCs, which run mutual funds. “Don’t marry an AMC, theme or sector. Don’t get too attached to a brand, sector, or AMC. Focus on the SIP’s performance,” advised Joseph,

Don’t exit in a panic
Market downturns are the best time for SIPs to work their magic. Since they invest at different market levels, they help in rupee-cost averaging, which lowers the overall cost per unit. Investors who stop SIPs during corrections miss out on buying at lower prices. “One of the biggest mistakes investors make is stopping their SIP during market corrections. Market downturns are actually an opportunity for cost-averaging, which enhances returns over time. Historically, SIPs held for 10 or more years have always resulted in positive returns,” said Rajani.

Don’t be too conservative in long-term SIPs
Investing in low-risk funds like debt or liquid funds for long-term SIPs may not yield the best returns. Equity SIPs provide better long-term growth due to their ability to outperform inflation. “When investing in SIPs for the long run, take on the risk of equities with diversified equity funds. Many have signed up for long-term SIPs in liquid funds or low-risk debt, which is not ideal,” Joseph explained.

Don’t expect quick returns
SIPs are designed for long-term wealth creation. Investors often expec quick profits within a short time frame. But experts warn that it often defeats the very purpose of SIP investing. Experts note that SIPs work best with a long-term commitment. This could be anything in the range of 10 years to 25 years.

Time or type does not matter
Rajani said that a common misconception is that SIP dates impact returns. “In reality, whether an SIP is scheduled for the beginning, middle or end of the month, the long-term difference is negligible,” she explained. Another myth is that breaking SIPs into daily or weekly contributions reduces volatility. “Data shows that over 10 years, the return difference between monthly SIPs and more frequent contributions is insignificant, making monthly SIPs the most efficient and practical option,” Rajani said.

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