Discontinuing Your Mutual Fund SIP Now Could Be a Mistake

SIPs deliver best returns during negative markets for two reasons: one, it helps to accumulate more units at the same price, and two, one will get decent returns when the markets stabilize and bounce back

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The historic volatility witnessed in March 2020 due to the pandemic caused a worry among investors. Even AMFI data suggests that the fund inflows were muted in the 2nd quarter of the year. The question is, “Should the pandemic or volatility become the reason to stop SIPs?” Equity investments can make one anxious and vulnerable. It is natural to become scared, but turning the back won’t help.

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SIPs deliver best returns during negative markets for two reasons: one, it helps to accumulate more units at the same price, and two, one will get decent returns when the markets stabilize and bounce back.

Markets are prone to mayhem. It can be scary but it is also probably the best time to invest and reach one’s financial goals easily. For example, if you are saving for your child’s education, and if your child is still young, you should understand that it will be long before you need money. Hence you should not worry about short term negative returns. Remember investing is about managing risk, and not avoiding it.

SIPs help you to accumulate more units. The value of these units will rise sharply when the volatility eases and markets recover. In the present pandemic, too, governments world over are announcing stimulus to bring the economies back on track. This will help the markets to achieve its fair valuations and be beneficial for your investments too. The present pandemic is a once in a lifetime event. Ideally, during the historic fall that was witnessed during March 2020, one should invest in lump sum even if it means one could experience negative returns in the short term and continue their existing SIPs.

An analysis of data reveals astonishing results. For example, among the large-cap funds, the best performing fund has delivered returns of 42 per cent, 7.78 per cent, 9.64 per cent and 11 per cent returns in 6 months, 1 year, 5 years and 10 years, respectively. Among multi-cap funds, the results are even more astonishing, the best performing , multi-cap fund has delivered a staggering 89 per cent return in 6 months and 29.60 per cent return in 1-year period. If the investments are stopped, an investor can lose as much as 3 per cent CAGR returns.

In the volatile times, you can adopt a 'core & satellite' approach which is designed to minimize costs, tax liability and volatility. It provides an opportunity for the investor to outperform the broader markets as a whole. Ideally, during volatile times an investor should invest via SIP in a staggered manner. In this approach, the core portfolio consists of large-cap and multi-cap fund while the satellite portfolio consists of large and midcap and aggressive hybrid funds. Such an approach can increase the overall returns for the investor’s portfolio.

The pandemic is the worst time to stop your SIP. If you are not pressed by a medical emergency or any other financial trouble then you should continue your existing SIP. Remember the concept of SIP is about discipline, if one stops his SIP, the discipline is gone. Another reason to continue with the existing SIP is that the market can never be timed. Sometimes when the markets appear expensive, it may be the beginning of the even bigger bull run.

Investing decisions should be based on risk appetite and liquidity needs of the investor. Investing helps to fulfill financial goals and this is only possible when there are an active involvement and ability to stick to one’s plans. Many investors prefer to exit the market during times of volatility, their contention being they would buy during extreme fall, but it is impossible to time the market even when it is falling like a knife.

What is the ideal solution then? Follow the disciplined investing approach. Instead of stopping your SIPs, you should consult a qualified financial advisor and change the asset allocation according to the market conditions. This helps in the natural diversification of the portfolio. Not only this helps to protect one’s wealth but also helps to earn decent returns over a period of time. The pandemic has wreaked havoc with individual finances, if you have a financial emergency, you can pause your SIP temporarily and continue once your finances become better. The decision to SIP shouldn't be influenced by the market condition; it should be influenced by your financial goals.