Every time equity markets experience short-term volatility; doubts begin to cloud the minds of most investors – is it time to discontinue the SIP investment? This is especially true in the case of mutual fund investors who began their investment journey a few years ago, without experiencing drastic market fluctuations. A crucial piece of advice every mutual fund advisor recommends is not to pull out of SIPs in mutual funds when markets are experiencing a tumult.
This article looks at why you may not want to stop your SIPs when the market is down.
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The concept of rupee cost averaging
SIPs allow you to invest regularly in small fixed amounts and enter the market at different phases. This means, if the market is low, you can buy more units. Purchasing additional units can help you average your purchase cost and accumulate units over a period. Added units can mean a quicker route to wealth creation once the market rebounds. However, if you discontinue your SIP mutual fund investment, the power of compounding breaks with a shortfall in your corpus amount.
Let us understand this better with the help of an illustration.
Mr. A invests in mutual funds via monthly SIPs of Rs.5,000. He has been investing since April 2007 with the aim of ten years.
Scenario 1: Regular SIP
Mr. A continues to invest irrespective of market volatility.
- Invested amount – Rs.6 lakh
- Final value – 12.2 lakh
- Returns – 13.6%
Scenario 2: Stopped at high
Mr. A stopped investing after a few months when the Nifty PE crossed 22, and the market was at a high.
- Invested amount – Rs.4.25 lakh
- Final value – 9.37 lakh
- Returns – 14.7%
Scenario 3: Stopped at low
Mr. A stopped investing when the Nifty PE fell below 15, and the markets crashed.
- Invested amount – Rs.5.65 lakh
- Final value – 10.8 lakh
- Returns – 12.8%
*Returns are calculated using IRR formula. SIP returns are calculated based on the Diversified Equity Funds Index.
Till the time Mr. A continued to invest, he amassed a substantial corpus of Rs.12.2 lakh. In the second scenario, even though returns were better, the corpus amount reduced due to SIP discontinuation. Similarly, in the third scenario returns as well as the corpus amount dropped drastically, thus, defeating the purpose of SIPs.
Monitor your portfolio
Some new investors begin SIPs but do not review their portfolio. While SIP investments do not demand continuous market monitoring or regular corrections, it can be a good idea to inspect one’s portfolio once or twice a year. For instance, if you notice a fund underperforming consistently, you can shift to another with better prospects of achieving your financial goal.
The recent slide in the market unnerved several investors. Neither were many pleased about the returns gained over a year or two. Although those are understandable emotions, financial planners recommend not to be rattled by recent developments. Instead look at down markets as an opportunity to accumulate units, especially for long term goals. The only time to consider stopping SIPs is if you have reached your financial goal. To begin investing, you can start by knowing what is a mutual fund and how to invest in SIP.