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Amidst the persisting market volatility, the monthly SIP (Systematic Investment Plan) inflows into mutual funds have sustained over Rs. 8,000 crores for 16 months. (Period- Dec 2018 – March 2020). Source: Association of Mutual Funds in India
This shows that retail investors continue to trust in the markets by investing through SIPs. However, the data regarding the number of SIPs discontinued over the period reflects some exciting insights into investor behaviour. While around 59 lakh SIPs had been discontinued during 2018-19 still the SIP inflows are cushioned by regular SIP additions as well, the increasing number of discontinued SIPs can be seen as a reaction of existing investors to protect their portfolios from further losses.
The recent market correction amid Coronavirus fears has brought the markets back to the levels persisting around three years back, and the investors who had started investing in the markets recently would be noticing losses in their portfolios. Negative returns in the investment portfolio may be a sufficient cause of action for the investors to discontinue the SIP investments and redeem the investments to prevent further losses. However, here are five significant reasons on why one should not stop their SIP mutual fund investment during such times:
Continuing with the Investing Journey
The investing journey is not only about keeping funds aside for specific goals, but instead to enjoy the journey towards the destination. If one decides to stop their mutual fund SIP due to fall in markets, he/ she is effectively stopping mid-way in pursuit of the final destination. Instead, continuing to invest through SIPs can help you stay on track to achieve the financial goals in a time-bound manner.
Investing at Lower Valuations
Investing in the markets is always a tricky question, one generally tends to wait for the right time and right valuations to invest. When the markets fall, the valuations get relatively comfortable for investment. However, the emotional bias continues to dominate the investment behaviour wherein the fear of losing further into the markets keeps one away from making fresh investments.
Instead, one must appreciate that one can make periodic investments in SIP automatically irrespective of market ups and downs. Investing at lower valuations during the market fall allows the investors to get higher units per SIP instalment, which can also help to average out the cost of investments.
Compounding
SIP is one of the excellent ways to maintain financial discipline into the lives. When the investing journey needs to be more focused on ‘time in the market,’ investing consistently can help the investors to continue their investing journey into the markets. As one allows his/ her investments to grow over time, the power of compounding enables the investors to generate exponential returns over a period as the returns on existing investments also contribute towards the investment returns.
Believing in the Long-Term Wealth Creation Potential of the Markets
The investors need to realise that while the markets may be volatile over the short term, they carry immense wealth creation potential, as also reflected by the historical performance of the markets. The investors have generated around 16% compounded annual returns in S&P BSE Sensex over the last 40 years since its inception. (Source: MFI Explorer) The investors may focus on the short-term charts, which may feature multiple peaks and troughs; the long-term chart is what matters, which will generally be trending upwards in the long run. As such, the decision to discontinue SIPs during the market corrections may cause the investors to miss out on the potential of higher returns during the market rallies.
Professional Fund Management for the money invested
While one may be looking for alternate investment avenues after discontinuing the SIPs, it is better to continue the SIP investments and continue to avail the benefit of professional fund management for your hard-earned money.
While it may not be pleasant for the investors to notice negative returns in the portfolio, continuing the investments into the markets can help the investors to average out their cost of investments, thereby implying a higher margin of safety for the investment portfolio. While the fear psychosis may be overpowering the investors currently, it is essential to remember what Warren Buffett once suggested, “one should be fearful when others are greedy, but one should be greedy when others are fearful.” One must stay committed to the financial plans, enabling themselves to have pleasant investment experience.