Stock market volatility can test the resolve of even the most seasoned investor. When markets enter bearish territory, it is common to see systematic investment plan (SIP) discontinuations spike as nervous investors pause investments to stem losses. However, this reaction may work against your best interests. Here’s a closer look at why stopping your SIPs during market downturns could diminish your long-term investing success.
Understanding How SIPs Work During Volatile Markets
SIPs facilitate discipline in your mutual fund investment by allowing you to commit a fixed amount at preset intervals, regardless of market conditions. This money goes towards purchasing fund units. When markets decline, fund net asset values (NAVs) fluctuate with the overall market indices.
So, your unchanged SIP investment now affords you more units since prices have decreased. In simple terms, this investment strategy is called rupee cost averaging. You can use an SIP calculator to estimate the long-term benefits of staying invested. In effect, continuing SIPs during turbulent times leads to the automatic accumulation of more units, positioning you favourably for the eventual upswing.
Reasons Why Stopping Your SIP Might be a Mistake
Stopping your SIP can be a mistake and might stop you from achieving several things:
Reason 1: Missed Opportunity to Purchase More Units
The primary benefit of persisting with SIPs during market corrections is that you capitalise on the opportunity to acquire more units for the same investment amount, thanks to lowered NAVs. Discontinuing SIPs deprives you of this chance to purchase units at a discount, leading to opportunity loss. When the recovery gathers, the gains on these additional units could have amounted to substantial sums over extended timeframes.
Reason 2: Loss of Potential Upside Gains
Financial markets move in cycles, and periods of heightened volatility are usually followed by eventual recoveries. Historically, equity markets have rebounded after every bear phase to achieve new highs. By pressing pause on SIPs during market drops, investors often miss out on the sharp up-moves when sentiments finally turn.
Exiting SIPs necessitates potentially long waiting periods before re-entering at much higher levels later. This may substantially impact overall investing returns over long investment horizons.
Reason 3: Long-Term Investing Warrants Consistency
SIPs aim to achieve various long-term monetary objectives such as retirement planning or children’s education funding. When interrupting your SIPs, you prioritise short-term market fluctuations over your long-term goals. Staying invested over extended time periods allows your investments to gain from the power of compounding.
The longer you remain invested, the more your wealth can grow exponentially rather than linearly. Discontinuing SIPs disrupts this compounding effect, negatively impacting your chances of realising your long-term financial aspirations. Mutual fund investment is one of the most effective ways to build long-term wealth through disciplined SIP contributions. Investing in mutual funds helps diversify risk while allowing your money to grow over time.
Reason 4: Stick to Your Financial Plan
SIPs are often an essential part of a well-structured financial plan. Stopping them midway disrupts your investment strategy and can delay your financial growth. Instead of stopping your SIPs due to market volatility, reassess your risk tolerance and make necessary adjustments to your portfolio. Stick to your financial plan and continue investing regularly to achieve your long-term financial goals.
If you haven’t already, open a demat account to start or continue your investment journey confidently.
Conclusion
It is understandable that market declines rattle investors and evoke strong risk-aversion. However, letting fear push you into abruptly stopping your SIPs could significantly impact your overall investing success. SIPs help you capitalise on down markets through rupee cost averaging. By exiting prematurely, you lose out on this opportunity.
