Mutual Fund Investment: 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. Let’s understand how.
A Systematic Investment Plan (SIP) is designed to work precisely because markets go through ups and downs. When prices fall, SIPs automatically buy more units. When prices rise, those extra units multiply in value.
Created with AI. Errors are possibleHowever, when investors stop their SIPs during downturns out of fear or uncertainty, they unknowingly block the very mechanism that drives long-term compounding.
Through this article, let’s understand how two investors hypothetically investing the same amount in the same market can end up with drastically different results, not because of market performance, but because of their behaviour during market falls. We took the insights from the ET Now Swadesh YouTube video in which Nikhil Kothari of Etica Wealth exclusively shared his views on the matter. Here’s what you should know.
Situation 1: What could be the real cost of stopping an SIP for even 6 to 12 months during a market correction?
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.
Situation 2: How does missing just a few months of SIP affect compounding over 10 to 20 years?
Let’s understand it with the help of an example.
If you stop your SIP during this period, you miss the opportunity to buy more units. But the investor who continues investing Rs 10,000 now gets around 285 units instead of 200 units.
That means he gets nearly 42 per cent more units because of the market correction. Every market correction allows SIP investors to accumulate units more cheaply, reducing the average cost dramatically. When markets recover, these accumulated units create substantial wealth.
That is why patient investors who continue SIPs during downturns generate much larger wealth compared to those who stop investing.
Situation 3: 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.)
