Insights

Don’t stop your SIPs

March 13, 2018 . Bhavana Acharya

With markets falling since February, worry over further corrections may tempt you into stopping your SIPs. But this is not the time to stop SIPs. Why?

For a SIP to be effective and deliver the full impact, it must run through correcting market. Since 2014, markets have more or less been trending higher. We have had very brief corrective periods since then. When markets are trending higher, your SIP investment has been made at higher and higher levels, i.e., your average investment cost is rising. So how do you bring this down?

By investing through a correcting market. Because you’re buying at lower levels, it can bring your costs down. You need to run it through the corrective period and not back out quickly. So, in stopping a SIP during falling markets, the opportunity to bring costs down slips out of your hands. Profits and thus returns are maximised only when costs are minimised. This is the time to continue SIPs to bring down your cost.

Consider the period from January 2010 to March 2018 and a monthly SIP of Rs. 1,000. This is a good 8-year period. Now, let’s say you stopped investing in the downturn of 2011; assume you waited until the correction really got underway in March 2011 and you waited until the pick-up in mid-2012. That means you did not invest in just 15 months out of nearly 100. Here’s how much you would have lost for every Rs. 1,000 in SIP, taking some key equity funds.

FundWithout stopping SIPWith SIPs stopped from Feb 2011 till May 2012 What you lost
Total amt. InvestedTotal valueAvg. cost per unitTotal amt. InvestedTotal valueAvg. cost per unit
Aditya Birla Sun Life Frontline Equity₹99,000₹1,80,224₹114.9₹84,000₹1,42,172₹123.58₹38,052
HDFC Mid-cap Opportunities₹99,000₹2,44,526₹22.46₹84,000₹1,90,379₹24.48₹54,147
Kotak Select Focus₹99,000₹2,00,591₹15.62₹84,000₹1,57,534₹16.88₹43,057
SBI Bluechip₹99,000₹1,87,239₹19.43₹84,000₹1,46,388₹21.08₹40,850
HDFC Balanced₹99,000₹1,92,644₹74.83₹84,000₹1,53,430₹79.72₹39,214
Returns as of March 7, 2018

At best, you may have put this into fixed deposits. At worst, you may have spent it.

Now, consider the reasons for a SIP outside of cost averaging.

  • One is to avoid timing the market and getting it wrong. In stopping and starting SIPs based on your perception of the market, you are effectively timing your investments. This is one of the reasons why we have always advocated SIPs.
  • The second and most important, you are defeating the very purpose for which you began a SIP – disciplined investing that enables you to meet your financial needs. When you stop/pause SIPs, your investment is lower and thus your eventual wealth shrinks. Your SIPs are the basis on which you have planned your finances and goals. Therefore, you may find yourself short of funds when you actually need it. The longer the SIP is stalled, the higher is this risk. Even if you were to put this money into fixed deposits, their lower return compared to equity can still hurt your corpus creation.
  • Finally, remember, equity is an asset class that demands both a long-term view and the ability to weather falling prices. We have been worried over market valuations in the past year. Any correction at this point is useful to bring stock prices back into realistic zones which bodes well for long-term movement.

So stay calm, and stay invested!

Comments

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6 thoughts on “Don’t stop your SIPs

    1. Hi,

      A lot depends on your needs and your income. Rs 30,000 is a good sum to be investing each month. But if its a small part of your income then it’s not going to be adequate. Or, will it be enough to meet whatever goal or objective you are saving up for? You can use online SIP calculators (FundsIndia has several such calculators) to work out approximately how much your investment would amount to – based on the investment period, estimated return depending on the level of risk you’re taking. For example, assuming a 12% return (a reasonable moderate-risk return) and a 10 year period from today, your SIP would amount to Rs 70 lakh. Is this enough to meet your needs? If yes, then great! 🙂 If no, you need to step up investments. Note that you’d also need to add the projected value of your investments made thus far, again based on estimated return.

      Thanks,
      Bhavana

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  3. Hello Bhavana,
    Currently, I am investing in Mutual Fund with 20K Per Month and goal is to maximize my Investment for Future. Also doing Lump sum investment occasionally into same schemes approx. 10K-20K in a year
    1. HDFC Top 200 Fund-Regular Plan-Growth – 2000 (Large Cap)
    2. HDFC Mid Cap Opportunities Fund-Regular Plan– Growth -> 3000 (Small & Mid Cap)
    3. ICICI LTEF (Tax Saving)-Direct Plan-Growth -> 2000 (ELSS)
    4. Birla Sun Life Frontline Equity Fund -Growth -> 3000 (Large Cap)
    5. SBI Blue Chip Fund Plan-Direct Plan-Growth -> 2000 (Large Cap)
    6. Franklin India Prima Fund-Direct-Growth ->3000 (Small & Mid Cap)
    7. Kotak Select Focus Fund – Growth -> 2000 (Diversified)
    8. Mirae Asset Emerging Bluechip-Reg(G) -> 3000 (Small and Mid Cap Fund)
    9. ICICI Prudential Balanced Fund-Growth Complete 3 Years in Jan 2017 (Balanced)
    10. ICICI Prudential Balanced Fund-Direct Plan-Growth -> 20000 (Balanced)
    Please suggest if any add/deletion required in above MF Scheme for better return or do i need to switch in some other plan.
    Thanks in Advance !!

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