Systematic Investment Planning(SIP) | Why You Shouldn’t Stop Your SIP When The Market Is Low

While looking back at past events can give us an idea of how long certain market events lasted, nobody receives a calendar notice detailing the specifics of when, how deep, and how often the stock market will drop. At one moment, stock prices are at all-time highs; the next, they’re plummeting as a stock market downturn takes hold. Recessions in the market are widespread and can have a number of causes.

  • Systematic Investment Plan (SIP) mutual fund investment activity is significantly lower than the market saw about two years ago.
  • The entire amount of money collected through SIPs in mutual funds in 2020 was much less than the total amount received in 2010, according to reports from the Association of Mutual Funds in India (AMFI).
  • While SIP inflows were stable over time, the rate of increase was higher in 2018 and 2019 than in prior years.

“Time is the most crucial factor in maximizing the returns on equity investments.”

Why We Should Continue To Sip In a Downward Market?

  • When your investment funds are highly volatile, it might be difficult to maintain your emotional stability. For whatever reason, when market volatility rises, investors pull their money out of SIPs and start cashing out their investments much earlier than usual. 
  • It has been found by behavioral economists that investors are more sensitive to losses than to gains. When the markets enter a bear phase, many investors cash out their investments or cancel their SIPs to avoid further losses. However, if you are an investor with a longer time horizon, volatility is actually an ally.
  • Despite the uncertainty surrounding the near-term economy, long-term structural growth appears unblemished. Investors in stocks can get more for their money thanks to the market’s current state, making now an excellent time to enter the market. 
  • The recommended equity allocation for new investors is 65:35 split among large and medium-sized companies. Maintaining a healthy ratio ensures that your money is spread out among your funds in such a way that you can continue to profit even if the value of one of your funds drops.

Bonus Bite

SIP Vs FD | Fixed Deposit | Systematic Investment Planning|

  • Mutual funds, SIPs, and fixed deposits are all viable investment options; picking the right one will depend on your specific situation and objectives.
  • The benefits of each investment strategy are different. A fixed-income investment (FD) is safer than a systematic investment plan (SIP) or mutual fund and guarantees a minimum rate of return.

Why Investor Hesitate to Continue SIPs

  • Many first-time investors have been put on hold due to the stock market’s gyrations. As a result of the recent market volatility, many investors have either ceased contributing to their SIPs altogether or are just contributing a little amount each month since they are registering new SIPs for alternative mutual funds. 
  • Many investors suffered a fictitious loss of money when the stock market crashed in March and April of 2020 for a variety of reasons, including concern about the development of the terrifying corona virus. Although these fluctuations are short-lived, many novice investors who aren’t financially prepared to weather the storm rush to either cancel their SIPs or cash out their money. 

“When the market is performing poorly, however, should one cancel their systematic investment plan (SIP) or redeem their existing investments?”

  • Investors who cash out their holdings during the sudden decline in the market are effectively turning a theoretical loss into a real one. Investment performance over the long term is provided by mutual funds.
  • Selling a mutual fund before it has fully appreciated is like selling a stock before it has fully appreciated because, historically, mutual funds have provided better after-tax returns than fixed deposits.

5 Mistakes You Should Avoid Making In A Bear Market.

  1. Acquiring A New Debt
  2. Selling Out Of Fear As The Stock Prices Fall
  3. Accepting Responsibility For Other People’s Debt By Cosigning On Loans 
  4. Neglecting Your Financial Objectives And Plans 
  5. Making An Effort To Predict Market Movements Adding To One’s Existing Debt Load
  • It’s important to remember that market downturns are temporary, even if they feel very permanent at the time. In the grand scheme of things, this may be the deciding factor in how you approach investing generally. 
  • It is risk management, not risk aversion that ultimately determines investment success. The loss you’ve experienced so far is only temporary, but if you pull out of your SIP investments now or, even worse, sell them, you’ll be stuck with that loss forever.
  • Small Investment Programs are most effective during economic downturns. When the market is volatile, investments made through a SIP perform better. Buying more units of a fund when its NAV (Net Asset Value) falls because of a falling market is a good strategy. 
  • As the market improves, your SIP investments may be worth more and generate higher returns. Rupee Cost Averaging is the name given to this miraculous occurrence.

Bottom Lines

  • Debt Funds are suitable for investors who are not willing to take any chances.It is recommended that, for the time being, investors focus solely on Large Cap Funds. 
  • If you’re looking for consistent gains, large-cap equity funds should make up a significant portion of your portfolio. Multi-Cap Funds are the way to go if you’re looking for bigger returns than Large Cap with a pinch of risk. 
  • You should choose Flexible Solution Funds as an alternative if you want the best of both stability and strong returns from your investments.
  • Better yet, set aside some money in the form of Liquid Funds using Smart Deposit in case of an unexpected expense.
  • The slowdown in the economy is no reason to abandon your mutual fund investments. Despite the current state of the market, there are many reasons to be optimistic about its eventual recovery. 
  • You can expect a return on investment when that occurs. The key is to diversify your holdings as much as possible when constructing your portfolio.