Mutual Fund SIP: In the rebound in the stock market after the Covid-19 pandemic, small-cap mutual funds have delivered stellar returns to their investors. The Nifty Smallcap 100 TRI, the benchmark index of small-cap funds, delivered an impressive 114 per cent return during the period. However, small-cap funds crashed in 2022 following extreme volatility in global and Indian stock markets following the Russia-Ukraine crisis. In this bumpy ride of the stock market, Systematic Investment Plan (SIP) investors are advised to avoid some common mistakes that a mutual fund SIP investor usually makes in such a volatile market.
Here we list down the top 5 mistakes that a small-cap mutual fund SIP investor should avoid:
1]Making small-cap funds a part of the core portfolio: An investor can follow the core and satellite portfolio strategy while investing in equity fund To achieve important financial goals. Core portfolio provides stability as it consists of large-cap, index and other funds which are less risky than small-cap. Satellite portfolio is a strategic allocation where you take on a comparatively high risk to increase the overall portfolio return. Small-cap mutual fund SIPs should be a part of one’s satellite portfolio.
“You can invest in small-cap funds through Systematic Investment Plan, with SIPs as a part of satellite portfolio and not as core portfolio. But, these funds go through heavy volatility and Stocks are in the grip of a correction. If you make small-cap funds a part of your core portfolio in a weak market, if small-cap funds fall further, it could wipe out your investments,” said Clear’s founder and CEO Archit Gupta said.
2]Waiting for the right time to enter: to start mutual fund sipOne does not need to wait for the right time as SIP gives the average return given by the index over the investment period. Hence, one can start a mutual fund SIP at any time and there is no need to wait for the weak market to settle down.
“Even now many investors wait for the right time to invest. It is like market timing. The primary objective of SIP is to invest in all market movements. According to Warren Buffett, one of the most successful investors, the best way to invest Right Time Abhinav Angirish, Founder, Investonline.in said, “Investing as early as possible gives more time for compounding.”
3]Investments in small-cap funds that have crashed heavily: It is advisable for a one-time investor to invest in such small-cap funds that have seen a steep decline during the bear market. However, for a SIP investor, such a practice is suicidal as it drags down the average return at the time of maturity. One should look at those small-cap schemes, which have made the least losses during market downturns as they are more likely to recover once the market stabilizes.
“You might like to invest in small cap funds Which has crashed heavily during a bear market. However, while investing in small-cap funds through SIP, you can choose funds that perform consistently over three to five years. In addition, you should examine the performance of small-cap funds in past bear markets. It helps in choosing those small-cap funds that have outperformed their benchmark and peers in the downturn of the stock market. If you choose small-cap funds that have crashed heavily in a weak market, regardless of their track record, you may not realize the high returns when the small-cap space outperforms,” says Cleary. Archit Gupta says
4]Not to increase the SIP amount: A small increase leads to a large increase in the maturity amount of the mutual fund. Therefore, irrespective of the market mood, mutual fund SIP investors are advised to increase their SIP amount at regular intervals without fail under any circumstances.
“Increase your SIP as your income increases. This will help you accumulate a bigger corpus with a small increase in your SIP every year. It may sound surprising but just one SIP 5000 every month for 30 years you can get a corpus of Rs. 1.74 crores. But if you increase your SIP by just 10 per cent every year, the same amount becomes 4.40 crores!,” said Abhinav Angirish of Investonline.in.
5]Closing the SIP when the market is weak: Many people invest through SIPs in small-cap funds when they are performing well and lock them in weak markets. If you panic and stop SIPs in small-cap funds during market volatility, you may not have the risk appetite to invest. Investing in small-cap funds through SIP helps you average out the purchase price of your investment, which is called Rupee Cost Averaging. For example, SIP enables you to invest a fixed amount at regular intervals in mutual funds irrespective of the level of the stock market.
“When the stock market is down you will accumulate more units and when the market is up you will accumulate fewer units. This helps to average the purchase price of the unit over time without timing the stock market. However, if If you close an SIP in a small-cap fund in a weak market, you will lose the opportunity to average out the purchase price of units at lower market levels, said Archit Gupta of Clear.