Mutual fund: When investors stop their SIPs during downturns out of fear or uncertainty, they unknowingly block the very mechanism that drives long-term compounding. A stock market crash is something that often affects investors, enabling some of them to stop their SIP (Systematic Investment Plan) contributions.
The biggest fear in the stock market is often believed to be a market crash. But in reality, for long-term SIP investors, the bigger fallback could be something else: stopping the SIP during a market fall because the market corrections are temporary, but the decision to pause or discontinue SIPs during these periods can cause permanent damage to wealth creation.
Created with AI. Errors are possibleDuring the market crash, usually investors panic, and one of the crucial questions that arises is ‘Shall I stop my SIP since the market is not doing well’? A report by WhiteOak Capital Mutual Fund explains whether one should stop their SIP or not in case the market is not doing well.
What happens when you stop SIPs during crisis?
Every time markets go up, people feel comfortable investing. But when markets crash or fall sharply, fear takes over, and investors panic. Many people stop their SIPs, thinking, I will pause for some time and restart later.
But even stopping an SIP for a short period can have a huge impact on long-term wealth creation. Let’s understand it with an example.
Suppose there are two investors, Vinay and Aakash. Both start an SIP of Rs 10,000 per month for 10 years. For the first two years, markets perform well, and both continue investing.
In the third year, the market falls by 30 per cent. Vinay stops the SIP completely for one year and restarts from the fourth year onward. Thinking, I stopped only for one year. How much difference can it really make?
Now let’s see the numbers.
The second investor remained patient and continued investing through the market fall. He invested Rs 12 lakh and accumulated around Rs 26 lakh.
The difference in investment amount was only Rs 1.2 lakh. But the difference in wealth creation was more than Rs 7 lakh. That’s the impact of stopping SIPs during market falls.
Mutual fund: Shall I stop my SIP since market is not doing well?
According to the graph, equity as an asset class is highly volatile, and there can be phases where SIP returns remain low during the initial years of investment. The shaded portions in the chart highlight periods when the first 5-year SIP returns were either below or above the 8 per cent mark.
The data shows that when the average SIP return during the first 5 years was 8 per cent or less, the total 10-year SIP average return later increased to 18.30 per cent XIRR. On the other hand, when the first 5-year SIP return was more than 8 per cent, the average 10-year SIP return stood at 14.70 per cent XIRR.
This suggests that SIPs, which started with weaker or slower returns in the initial years, eventually generated better long-term returns on average over 10 years. The presentation, therefore, concludes with the message, “A Slow Start is a Good Start!!”
If someone has already stopped their SIP, can the damage be reversed?
What should they do to get back on track?
Whenever markets are weak or moving sideways, investors should increase their SIP amounts or invest additional lump sums. This helps accumulate more units at lower prices and averages down the overall cost.
The missed opportunity by the investor cannot be completely recovered immediately, but disciplined investing during future corrections can help reverse part of the damage.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
