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5 Critical Mistakes SIP Investors Must Avoid

sip investors | marketfeed

Investing through Systematic Investment Plans (SIPs) can be a powerful way to grow your wealth over time. However, many investors unknowingly make mistakes that can severely limit their returns. These mistakes often allow brokers or banks to benefit at your expense, leaving you with lower profits than expected. In this article, we’ll explore five common mistakes SIP investors make and how to avoid them. Learn how to maximise your profits and safeguard your financial future!

1. Choosing Regular Mutual Funds Over Direct Mutual Funds

One of the most common mistakes investors make is not understanding the difference between regular and direct mutual funds. Regular mutual funds involve a middleman—often an agent or broker—who takes a commission on your investments. This commission can range from 1% to 1.5% or even higher, depending on the mutual fund scheme. Over time, this seemingly small percentage can have a massive impact on your returns.

For example, if you invest ₹10,000 every month in a regular mutual fund with a CAGR (Compound Annual Growth Rate) of 22.8%, your returns after 20 years could amount to ₹4.63 crores. However, if you had chosen a direct mutual fund with a slightly higher CAGR of 24.6%, your returns would have increased to ₹6.33 crores— a difference of ₹2 crores!

Solution: Always opt for direct mutual funds when possible. You can easily switch from regular to direct funds by stopping your regular SIPs and starting new ones with direct funds. While there may be a small tax implication, the long-term benefits are worth it.

How to Identify Regular and Direct Mutual Funds?

When investing, look for clear indicators on the mutual fund’s platform. Most reputable mutual fund houses will display both regular and direct options. If you’re approached by a bank or broker, they will likely recommend regular funds. If you prefer to manage your investments independently, opt for direct mutual funds to enhance your returns.

2. Selecting IDCW Mutual Funds Instead of Growth Plans

Another common mistake is choosing Income Distribution cum Capital Withdrawal (IDCW) mutual funds instead of Growth Plans. IDCW funds distribute dividends to investors, which might seem attractive for those seeking regular income. However, this option can hinder the compounding benefits of your investment, ultimately reducing your long-term returns. In contrast, growth mutual funds reinvest profits back into the fund, allowing your investment to compound over time.

For instance, an HDFC Flexi Cap mutual fund with an IDCW option might yield a 12% CAGR, whereas the same fund with a growth option could yield over 23% CAGR. The difference in returns can be substantial over time. Moreover, the taxation on IDCW could further reduce your net gains.

Solution: Always choose the growth option if your goal is long-term wealth creation. This allows your returns to compound within the fund, leading to higher gains over time.

3. Lack of Diversification: Investing Solely in Small-Cap Funds

Diversification is a fundamental principle of investing that many SIP investors overlook. Investors often get swayed by the impressive returns of small-cap funds, leading them to allocate all their investments into these high-risk funds.

While small-cap funds may have outperformed the market recently, they can also be highly volatile. Investing all your money in small caps without diversifying into large-cap or mid-cap funds exposes you to increased risk. During market downturns, small-cap funds often underperform, which can lead to significant losses.

Solution: Diversify your investments across large-cap, mid-cap, small-cap, and flexi-cap funds. You can also consider a portfolio that includes various asset classes, such as gold and debt instruments. For example, gold often performs well during market crashes. This provides a safety net that can be leveraged when equity investments decline in value. This strategy allows you to capitalise on different market conditions and helps mitigate risks.

Identifying Overlap in Mutual Funds

Even when diversifying, it’s crucial to ensure that your funds are not investing in the same underlying stocks. Use platforms to check the fund’s holdings and understand their investment philosophy. If multiple funds have significant overlaps in their holdings, it reduces the effectiveness of your diversification strategy.

4. Not Having an Emergency Fund

Investing in SIPs without first establishing an emergency fund is a mistake that can jeopardise your financial goals. Life is unpredictable, and an unexpected event, such as job loss or a medical emergency, could force you to sell or liquidate your SIP investments prematurely. This could result in losses, as you may need to sell your holdings during a market downturn.

Solution: Before starting any long-term investments, ensure you have an emergency fund in place. This fund should be easily accessible and sufficient to cover at least six months of living expenses. You can keep this fund in a high-interest savings account or a liquid mutual fund.

5. Ignoring Health and Term Insurance

Many individuals are eager to grow their wealth through SIPs but overlook the importance of protecting themselves and their families against unforeseen events. Health emergencies can arise at any time. Without proper insurance, you may be forced to dip into your investments to cover medical expenses.

For instance, let’s say you’ve been investing ₹10,000 monthly in SIPs, targeting ₹6.33 crores over 20 years. However, a health emergency after five years forces you to withdraw from your SIPs, leaving you with only ₹11.8 lakhs—far below your goal.

Solution: Ensure you have a comprehensive health insurance plan and a term insurance policy before committing to long-term SIP investments. If you have limited funds, it’s better to reduce your SIP contributions to allocate some funds towards insurance premiums. This safety net will protect your investments and help you stay on track to achieve your financial goals.

Conclusion

Investing in SIPs can be a rewarding strategy for wealth accumulation, but it’s essential to avoid common mistakes that can undermine your efforts. By understanding the differences between regular and direct mutual funds, choosing the right fund type, diversifying your investments, establishing an emergency fund, and securing adequate insurance, you can enhance your investment outcomes significantly.

Take the time to review your current investment strategy and make necessary adjustments to avoid these mistakes. By doing so, you will not only protect your wealth but also maximise your potential returns over the long term. Start today by addressing these critical areas and watch your investments flourish!

Watch the full video on marketfeed’s YouTube channel: SIP Mistakes to Avoid in 2024 | marketfeed

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Which are the Top FMCG Stocks in India?

Products that are sold quickly and at relatively low cost are known as fast-moving consumer goods (FMCG). Another name for such products is consumer packaged goods. FMCGs have a limited shelf life due to high consumer demand (such as for soft drinks and confections) or perishability (such as for meat, dairy products, and baked goods). The top three sectors of this business are Food & Beverages (19%), Healthcare (31%), and Household & Personal Care (50%), respectively. In this article, explore the top FMCG stocks in India!

An Overview of the FMCG Industry

India’s FMCG industry is the biggest in the world. It is estimated that the FMCG sector accounts for around 15% of India’s gross domestic product (GDP) and employs more than 1 crore people. Consumer electronics, food, personal care products, home goods, over-the-counter medications, and other items are all included in this industry. The FMCG industry is optimistic about at least 20% growth in 2023 after ‘exponential growth’ in 2022:

  • Favourable government policies, a growing rural market and young population, and the expansion of e-commerce platforms are some of the sector’s main development factors.
  • India has a middle-class population that is greater than the population of the USA, making it a country that no FMCG company can afford to ignore.  The FMCG market keeps expanding as more and more people begin to climb the economic ladder and the general public obtains access to the benefits of economic progress. 
  • More importantly, India’s population is getting more consumerist with growing disposable income. Government efforts to broaden financial inclusion and provide social safety nets have further contributed to this. 
  • The FMCG market in India is expected to increase at a CAGR of 14.9% to reach $220 billion by 2025, from $110 billion in 2020. 

Top FMCG Stocks in India:

S. No.Stocks5-Year Returns
1Hindustan Unilever Ltd. 62%
2ITC Ltd.72%
3. Nestle India Ltd. 123%
4Britannia Industries Ltd. 61%
5Varun Beverages Ltd.696%
(Figures are as of July 17, 2023. Past performance is no guarantee of future results)

1. Hindustan Unilever Ltd (HUL)

Home care, beauty & personal care, and foods & refreshment are Hindustan Unilever Ltd’s three main FMCG business sectors. The company sells its products largely in India and has manufacturing plants all across the nation. With over 40 brands available across 12 distinct categories, including personal care, fabric care, skincare, hair care, oral care, deodorants, cosmetics goods, beverages, ice cream, frozen desserts, and water filters, HUL is an important part of millions of Indians’ lives. Dove, Lifebuoy, Knorr, and Pears Soap are a few of their brands. Home care brings in 34% of the company’s income, followed by beauty and personal care (44%) and food & drink (19%). HUL has also forayed into the health and wellbeing segment through two strategic investments.

Over the last 5 years, the company’s revenue has grown at a CAGR of 9.35%, while profits have a CAGR of 14.6%. The company is nearly debt free and has a healthy dividend payout ratio of 99.9%. The stock has moved up 62% over the past five years. 

2. ITC Ltd

Established in 1910, ITC is the biggest cigarette producer and retailer in the nation. The five business divisions that ITC now works in are FMCG Cigarettes, FMCG Others, Hotels, Paperboards, Paper and Packaging, and Agri-Business. Aashirvaad, Sunfeast, Yippee!, Bingo!, B Natural, ITC Master Chef, Fabelle, Sunbean, and Fiama are among ITC’s top FMCG brands. Additionally, it has added frozen food items, ghee, dairy products, and premium chocolates to its collection of branded packaged meals. ITC is known for assuring precise production and packaging quality. They have a wide variety of distribution outlets in India and have gained access to the remotest of locations through a variety of stores. It is anticipated that ITC will increase its involvement in the eastern market for spices due to its most recent acquisition of Sunrise Foods Pvt Ltd. 

The company is nearly debt free and has been maintaining a debt payout of 92%. Over the past five years, the revenue had a CAGR of 7% and net income has had a CAGR of 8%. The company has delivered a poor sales growth of 10% over the past five years. ITC stock has given a decent return of 72% over the past 5 years. 

3. Nestle India Ltd. 

Nestle India Ltd. is a dominant company in the Indian FMCG market with a strong market presence in the majority of its product categories. The business, which sells various goods under the Maggi brand is a trendsetter in the food service industry. In terms of dairy and nourishment products (96% in infant cereals), drinks (Nescafe 51%), processed foods (Instant Pasta Maggi -69%), kitchen aids (Nestle everyday 44%), and confectionery (63%). The company markets its products under the EVERYDAY, NESCAFE, NESTEA, Maggi, KitKat, Munch, Nestle, POLO, Bar-One, Milkmaid, Milkybar, Alpino, and Eclairs brands, among others.

Nestle India’s revenue has given a CAGR of 11.5% over the past 5 years while the net income has grown at a CAGR of 14%. The company has maintained a healthy dividend payout of about 91%. However, it has delivered poor sales growth of 11.0% over the past five years. The company’s stock has jumped 123% over the past five years. 

4. Britannia Industries Ltd. 

Britannia Industries has a rich 100-year history. It is one of the major leaders in the Indian biscuit industry with a market share of more than one-third in terms of value. The company’s portfolio has a good proportion of each of the seven varieties of biscuits it produces, including glucose, Marie, cookies, crackers, cream, milk, and health. Additionally, the company’s whole product line includes recognisable trademarks including Milk Bikis, Tiger, Marie, and Good Day. 

Over the past five years, revenue and net income have seen a decent CAGR of 9.3% and 11.5%, respectively. Despite maintaining a high dividend distribution of 123%, the company’s growth in sales over the previous five years was just 10.5%. Britannia’s shares have risen 61% in 5 years. 

5. Varun Beverages Ltd.

Varun Beverages Ltd (VBL) is engaged in the manufacturing, sales, and distribution of PepsiCo’s beverages in pre-defined territories in India. The company is PepsiCo India’s second-largest international franchisee (after the United States) for carbonated soft drinks and non-carbonated beverages. VBL is a part of the RJ Corp group, a commercial conglomerate with holdings in quick-service restaurants, dairy products, and healthcare. Some of the key brands sold under VBL include Pepsi, Mirinda, Mountain Dew, Seven-Up, etc. In addition, the company offers its products in Nepal, Sri Lanka, Morocco, Zimbabwe, Zambia, and Mozambique.

The company has reported an impressive revenue CAGR of 27% and a net income CAGR of 48% over the past 5 years. It has delivered good profit growth of 49.2% CAGR over the last 5 years. It has been maintaining a healthy dividend payout of 17.5%. However, promoter holding has decreased by about 4% over the last 3 years. The stock has given a spectacular return of 696% in the past 5 years.

Other Top FMCG Stocks in India:

  • Marico
  • Dabur India
  • Godrej Consumer Products
  • Colgate Palmolive
  • Tata Consumer Products
  • Jyothy Labs

In conclusion, India’s FMCG market is expanding quickly. Consumers are increasingly choosy and willing to pay more money for high-quality goods than low-quality ones. The FMCG market has expanded as a result of the rising demand for branded goods. It has grown faster in rural India than in urban India as a result of the expanding number of FMCG startups. The semi-urban and rural sectors are also experiencing rapid growth for these publicly listed FMCG firms in India. This makes FMCG one of the strongest sectors with very high potential. And now you know which are the top FMCG stocks in India you could invest in!

Disclaimer: The stocks mentioned in the article are solely for educational purposes. Please do your own research before investing.

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Jargons

Which are the Best Index Funds to Invest in India?

Index funds have gained popularity in the world of investing, offering a simple and effective way for individuals to participate in the stock market. There are funds that invest in a broader market index like Sensex or Nifty. Index funds replicate the risk and return of the market. In this article, explore some of the best index funds to invest in India.

Index funds are those which are not actively but passively managed by the portfolio managers. If an investor invests in an index fund, the maximum return he can receive is the market return. This return is lesser than the market return because of additional costs involved in investing.

How do Index Funds Work?

Consider an index fund that follows the NSE’s Nifty Index. There will be 50 stocks in this fund’s portfolio, all of which will be distributed in the same way. The index fund makes sure to invest in each and every security that the index monitors.

A passively managed index fund attempts to replicate the returns the underlying index provides, whereas an actively managed mutual fund strives to surpass its underlying benchmark. The low expense ratio of an index fund is one of its main unique selling points (USPs). The expense ratio is a small portion of the fund’s total assets that the fund house charges for fund management services.

How are Index Funds Different from ETFs?

An exchange-traded fund (ETF) may be traded (bought and sold) easily in the stock market, while index funds can only be traded at the set price point at the end of the trading day. Since ETFs trade like shares of stock on exchanges, they may be easier for retail investors to access and trade. Furthermore, they often charge lower fees and are more tax efficient. 

What are the Pros and Cons of Index Funds? 

ProsCons
Easy diversification Cannot outperform the market
Little research/knowledge necessaryLower potential returns
Reduced risk compared to actively managed fundsLittle protection from the downside (particularly during bear markets)
Lower costs compared to actively managed fundsNo control over fund composition

Which are the Best Index Funds to Invest in India?

S. No.Index Funds3-Year CAGR
1Motilal Oswal Nifty Bank Index Fund Direct-Growth25.94%
2UTI Nifty Next 50 Index Fund Direct-Growth28.64%
3Nippon India Index S&P BSE Fund Sensex Plan -Direct Plan – Growth Plan23.08%
4Motilal Oswal Nifty Smallcap 250 Index Fund Direct-Growth36.51%
5UTI Nifty Next 50 Index Fund Direct Growth19.42%
(Returns as of July 13, 2023. Past performance is no guarantee of future results)

1. Motilal Oswal Nifty Bank Index Fund Direct-Growth

  • Motilal Oswal Nifty Bank Index Fund Direct Growth has outperformed all other funds in its category during the past three years. It gave CAGR returns of 25.94% over the last 3 years. 
  • The index fund has assets under management (AUM) of ₹403 crores. AUM refers to the current market value of the funds that the mutual fund is managing. 
  • The expense ratio for Motilal Oswal Nifty Bank Index Fund Direct Growth is comparatively low at 0.33%
  • This index fund saw a 23.7% increase in AUM during the past three months, going from ₹326.48 crore to ₹403.77 crore.

2. DSP Nifty 50 Equal Weight Index Fund Direct Growth

  • DSP Nifty 50 Equal Weight Index Fund Direct Growth has given a CAGR of 28.64% in the last three years. 
  • It has a low expense ratio of 0.4%.
  • This is an equity index fund with NIFTY 50 Equal Weight TRI as its benchmark. So an equal amount of your money is invested in the stocks of each company that makes up the index.
  • Over the last 1 month, DSP Nifty 50 Equal Weight Index Fund Direct Growth has experienced a 15.2% growth in AUM, moving from Rs 500.1 crore to Rs 576.19 crore.

3. Nippon India Index Fund S&P BSE Sensex Plan Direct Growth

  • Nippon India Index Fund S&P BSE Sensex Plan Direct Growth has given a CAGR of 23.08% over the last three years. 
  • It has one of the lowest expense ratios in the category (index funds) at 0.15%.
  • Nippon India Index S&P BSE Fund Sensex Plan – Direct Plan – Growth Plan saw a 22.1% increase in AUM during the past three months, going from ₹367.4 crore to ₹448.45 crore.

4. Motilal Oswal Nifty Smallcap 250 Index Fund Direct-Growth

  • In the last 3 years, Motilal Oswal Nifty Smallcap 250 Index Fund Direct Growth has outperformed all funds in its category giving a CAGR of 36.51%. 
  • The expense ratio for this index fund stands at 0.36%.
  • Motilal Oswal Nifty Smallcap 250 Index Fund Direct Growth saw a 7% increase in AUM during the past month, going from ₹315.36 crore to ₹337.35 crore.

5. UTI Nifty Next 50 Index Fund Direct Growth

  • The UTI Nifty Next 50 Index Fund Direct Growth has given a CAGR of 19.42% over the last 3 years. 
  • The expense ratio for this index fund is 0.33%.
  • Over the last 3 months, UTI Nifty Next 50 Index Fund Direct Growth has experienced a 17.8% growth in AUM moving from ₹1,920 crore to ₹2,260 crore.  

Which are the Sector-Specific Index Funds in India? 

The objective of sector-based funds is to make investments in companies operating in the same sector or industry. For instance, there are index funds for the banking, IT, pharma, infrastructure, and consumer goods sectors. Typically, these sectoral funds serve broader categories. However, there are index funds with considerably more narrow and specific goals. A PSU bank-only or a private bank-only index fund is an option for investors, whereas a banking sector index fund is focused on the larger banking category.

A few good examples of best sector-specific index funds to invest in would include Aditya Birla Sun Life Banking ETF, ICICI Prudential Bank ETF, Axis Banking ETF in the banking sector, Axis Healthcare ETF, ICICI Prudential Healthcare ETF in the pharma sector, and Kotak IT ETF, SBI-ETF IT in the technology sector.

Benefits of Sector-Specific Investments

  • Targeted Exposure: Investing in specific sectors allows you to focus on industries you believe will perform well, potentially leading to higher returns.
  • Expertise and Knowledge: Utilize your understanding of a particular sector to make informed investment decisions and spot opportunities others may miss.
  • Diversification within a theme: Investing in sectors related to a specific trend or theme (like renewable energy) allows you to diversify while capitalizing on growth in that area.

Risks of Sector-Specific Investments

  • Concentrated Risk: Putting all your investments in one sector increases vulnerability to industry-specific challenges or downturns, potentially resulting in significant losses.
  • Volatility: Sector-specific investments tend to be more volatile and sensitive to sector-specific factors.
  • Limited Diversification: Overemphasizing a single sector may leave you exposed to risks and missed opportunities from other industries.
  • Regulatory and Legislative Risks: Changes in regulations or laws specific to a sector can impact its performance and profitability.

Should You Choose an Index Fund?

Since Index Funds track a market index, their returns closely resemble those of the index. As a result, these funds are preferred by investors who desire consistent returns and wish to engage in the equity markets without taking on too many risks. In an actively managed fund, the portfolio’s composition is altered depending on the fund manager’s prediction of the potential performance of the underlying securities. This increases the portfolio’s level of risk. Such risks are eliminated by the passive management of index funds. The returns will not, however, be significantly higher than those provided by the index. The best choice for investors looking for greater returns is actively managed equity funds.

Disclaimer: The index funds mentioned in the article are solely for educational purposes. Please do your own research before investing.

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What is The Difference Between NSE and BSE?

What is Stock Market?

A stock exchange plays a crucial role in facilitating the buying and selling of financial securities/instruments between investors and traders. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the leading stock exchanges in the Indian market. These exchanges operate under the rules and regulations set by the Securities and Exchange Board of India (SEBI), an authoritative body dedicated to safeguarding investor interests and fostering the growth of the Indian stock market. Read on to learn more about the difference between NSE and BSE!

What is Bombay Stock Exchange (BSE)?

The Bombay Stock Exchange (BSE) was established way back in 1875. Located on Dalal Street, Mumbai, it is the oldest stock exchange in Asia. There are more than 5,400 companies listed on the BSE. Its benchmark index, the S&P BSE Sensex, is widely tracked by investors across the globe. The Sensex (Sensitive Index) tracks the performance of 30 of the largest and most actively traded stocks on the BSE. As of 2020, BSE is the 10th largest exchange in the world in terms of the cumulative market capitalisation of all companies listed on its platform.

What is National Stock Exchange (NSE)?

The National Stock Exchange (NSE) was incorporated in 1992. It is also located in Mumbai. NSE is ranked the third-largest stock exchange globally in terms of the total number of trades in equity shares. There are more than 1,600 companies listed on the NSE. It is the first exchange in India to implement electronic or screen-based trading. The Nifty 50 is NSE’s benchmark index that represents the weighted average of 50 of the largest companies listed on its platform.

What are the Differences Between NSE and BSE?

Both NSE and BSE provide a platform for companies to raise funds efficiently. The exchanges allow investors to trade in equities, currencies, debt instruments, derivatives (F&O), and mutual funds. Moreover, they provide services such as risk management, clearing and settlement, and investor education. 

Basis of DifferenceNSEBSE
BriefNational Stock Exchange is the biggest stock exchange marketplace in India. They introduced the fully automated, electronic, and screen-based trading system in India.BSE or Bombay Stock Exchange is the oldest and the first stock exchange, not just in India but in the whole of Asia. They offer high-speed trading for their customers.
Number of Companies ListedNSE has nearly 2100 companies listed on it.BSE has about 5300 companies listed on it.
Benchmark Indices NSE’s benchmark index is the Nifty 50, which is based on the market capitalization of top 50 companies. BSE’s benchmark index is the Sensex, which is calculated based on the market capitalization of 30 companies. 
Derivates ContractNSE has a higher market share in the derivatives market than BSE with a market share of about 94%.BSE has a comparatively lower market share in derivatives with nearly 6%. 
Liquidity Of all the Indian stock markets, NSE has the greatest average daily turnover for equity shares.Low liquidity in comparison to NSE.
Products Offered Equity, Mutual Funds, Exchange-Traded Funds, Corporate Bonds, Initial Public Offering (IPO), Offer for Sale, and also Equity, Currency, and Commodity Derivatives.Equity, Mutual Funds, Exchange-Traded Funds, Security Lending & Borrowing Schemes, Corporate Bonds, Initial Public Offering (IPO), Institutional Placement Program (IPP), Offer for Sale, and also Equity, Currency, and Commodity Derivatives.

Which is better, NSE or BSE? 

While we cannot state specifically which is better, the choice will ultimately depend on your investing and trading styles/preferences. NSE is the preferred exchange for intraday, swing, and derivatives trading due to high liquidity. If you are a long-term investor, it does not matter where you buy/sell shares. However, BSE gives access to more than 5,000 stocks across various sectors. There could be a minor difference in the prices of stocks in NSE and BSE. The costs related to investing and trading are similar for both exchanges.

In conclusion, the investor’s profile ultimately determines which stock exchange they choose among the NSE and BSE. The NSE may be preferred due to its bigger trading volume, cutting-edge technology, and wide range of product offerings, while the BSE offers advantages due to its historical relevance and several specialized markets. Investors should carefully choose which exchange best fits their profile by evaluating their investment objectives, risk tolerance, and specific needs.