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Business News/ Money / Personal Finance/  Mutual funds SIP: 5 mistakes that small-cap investors should avoid in volatile market
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Mutual funds SIP: 5 mistakes that small-cap investors should avoid in volatile market

Mutual funds SIP: You will accumulate more units when stock markets are down and lesser units when markets rise

Mutual Funds: The primary purpose of SIP is to invest across all market movements.Premium
Mutual Funds: The primary purpose of SIP is to invest across all market movements.

Mutual funds SIP: In stock market rebound after Covid-19 pandemic, small-cap mutual funds delivered stellar return to its investors. The Nifty Smallcap 100 TRI, the benchmark index for small-cap funds, delivered stellar returns of 114 per cent in this period. However, small-cap funds crashed in 2022 after the Russia-Ukraine crisis sent global and Indian stock markets into extreme volatility. In this bumpy ride of stock market, systematic investment plan (SIP) investors are advised to avoid some common mistakes that a mutual funds SIP investor usually commit in such volatile market.

Here we list out top 5 mistakes that a small-cap mutual funds SIP investor needs to avoid:

1] Making small-cap funds a part of the core portfolio: An investor may follow the core and satellite portfolio strategy when investing in equity funds to attain vital financial goals. The core portfolio offers stability as it consists of large-cap, index and other funds that are less risky assets than small-cap. The satellite portfolio is a tactical allocation where you take a comparatively higher risk to enhance overall portfolio returns. Small-cap mutual funds SIP should be a part of one's satellite portfolio.

"You may invest in small-cap funds through the systematic investment plan, SIP as part of the satellite portfolio, not the core portfolio. But, these funds go through drastic up and down phases and are vulnerable to a stock market correction. If you make small-cap funds a part of your core portfolio in a weak market, it could wipe out your investment if small-cap funds crash further," said Archit Gupta, Founder & CEO at Clear.

2] Waiting for right time to enter: For starting a mutual funds SIP, one need not to wait for a right time as SIP gives average return given by the index during the investment period. So, one can start a mutual fund SIP any time and need not to wait for the weak market to stabilize.

"Even now many investors wait for the right time to invest. This is like timing the market. The primary purpose of SIP is to invest across all market movements. According to Warren Buffet, one of the most successful investor, the right time to invest is now. Investing as early as possible allows more time for compounding to work its wonders," said Abhinav Angirish, Founder at Investonline.in.

3] Investing in small-cap funds that have crashed heavily: It's advisable for one time investor to invest in a small-cap fund that has corrected heavily during the bear market. However, for a SIP investor, such practice is suicidal because it pulls down one's average return at the time of maturity. One should look at those small-cap plans that have lost the least during weakness in the market as they have strong chances of recovery once the market gets stabilized.

"You may prefer investing in small-cap funds that have crashed heavily during a bear market. However, when investing in small-cap funds through SIPs, you may pick those with consistent performance over three to five years. Moreover, you must check the performance of small-cap funds in previous bear markets. It helps to pick small-cap funds that have outperformed their benchmark and peers in a stock market downturn. If you pick small-cap funds which have crashed heavily in a weak market without paying attention to their track record, you may not realise higher returns when the small-cap space outperforms," said Archit Gupta of Clear.

4] Not increasing the SIP amount: A small increase leads to large increase in one's mutual funds maturity amount. So, irrespective of the market mood, a mutual funds SIP investor is advised to increase one's SIP amount at a regular interval without fail in any circumstances.

"Step-up your SIPs as your income increases. This will help you to amass larger corpus with a small increase in your SIPs every year. It might sound surprising but an SIP of just 5000 every month for 30 years can fetch you corpus of Rs. 1.74 crore. But if you increase your SIPs by just 10 per cent every year, the same corpus amounts to 4.40 crore!," said Abhinav Angirish of Investonline.in.

5] Discontinuing SIP when the market is weak: Many people invest in small-cap funds through SIPs when they are performing well and stop them in a weak market. If you panic and stop SIPs in small-cap funds when markets are volatile, you may not have the risk appetite for the investment. Investing in small-cap funds through SIPs helps you average out the purchase price of your investment, called Rupee Cost Averaging. For instance, SIP enables you to invest a fixed amount at regular intervals in mutual funds irrespective of stock market levels.

"You will accumulate more units when stock markets are down and lesser units when markets rise. It helps average the unit's purchase price over time without timing the stock market. However, if you stop SIPs in small-cap funds 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.

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ABOUT THE AUTHOR
Asit Manohar
Chief Content Producer at Live Mint Digital Team
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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Published: 09 Jul 2022, 07:56 AM IST
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