As an investor in small-cap mutual funds, market volatility can unsettle your investment experience. While systematic investment plans (SIPs) in small-cap funds have the potential for high returns over the long run, some common mistakes you make during volatile periods erode those profits.
Let’s understand the common mistakes you should avoid in a volatile market.
Many small-cap investors, like you, start SIP online with a very small amount, say Rs 1000-2000 per month, thinking that a small amount will not pinch your pockets. But such a small amount will not create a good corpus even in the long run. Investing at least Rs 5000-10,000 per month in SIP to achieve financial goals is always better. Increase the SIP amount with an increase in your income to generate good returns.
Not increasing the SIP amount
You can continue with the same SIP amount for years without increasing it. But the cost of living increases year after year due to inflation. If you do not increase your SIP amount to offset the effect of inflation, the goal amount will not be achieved. Increasing the SIP amount by at least 10% every year is advisable. This will ensure that you achieve the targeted goal amount.
Discontinuing SIP when the market is weak
You should stop or discontinue your SIPs when the stock market is weak or volatile. This is a big mistake. When the market is down, you get more units for the same SIP amount. This helps in cost averaging and accumulating more units. Staying invested for a longer duration is the key to generating good returns. Do not stop your SIPs when the market is weak.
Not reviewing and rebalancing the portfolio
You often invest in certain funds and then forget about them. Reviewing your mutual fund portfolio at least once a year is important. See how the funds have performed and compare them with their benchmark indices and peers. Stop some underperforming funds and start new SIPs in some better-performing funds. Rebalancing helps to redistribute the money into the right funds for the best returns.
Not having a long-term approach
Small-cap funds are very volatile and risky in the short term, but they have the potential to generate very high returns over the long term. You can enter small-cap funds to make quick money but withdraw within 1-2 years due to volatility and losses. You need a long-term investment horizon of at least 5-7 years to ride out the volatility in small-cap funds and benefit from the high growth potential. Stay invested for the long haul to accumulate wealth.
To wrap up
As an investor, you can avoid common mistakes and staying disciplined is important. Take the time to understand your risk tolerance and investment objectives before investing in small caps. Start with a well-diversified portfolio and consider including large-cap and mid-cap funds for stability.