Timing investment is nearly impossible because the best entry and exit opportunities are known only in hindsight. No one can predict market movements with certainty. Systematic Investment plan (SIP) is an effective route for an investor to create wealth over a long period of time. The power of compounding and disciplined investing allows an investor to amass wealth over 15-20 years. However, the faith of investors in the system has been wobbly these days given the unprecedented volatility and uncertainty that prevails in the financial markets. Despite the current investing climate, it may not be wise to take an impulsive decision to stop your SIP. Given below are the 5 things you should consider before discontinuing your SIPs.
Mutual funds, especially equity mutual funds are long term investment products. If you have invested in SIP, a single spell of volatility should not worry you. With SIPs, you reap the advantage of rupee cost averaging that takes care of market volatility. This means you buy more units when markets are falling, and lesser units when markets are high. While evaluating the scheme, pay attention to its long-term track record and to a host of quantitative and qualitative parameters. Benchmark your SIP to the overall index as well as to SIPs in competing funds in the peer group. This evaluation has to be done over 4-5 quarters, especially if your horizon is over 5 years. Check if your fund is constantly underperforming and putting your investment at risk. Only then, should you think about discontinuing it.
While transferring from one fund to another, especially in turbulent times, one has to take into account the switching cost. Different MF schemes may come with different exit loads, i.e. the fees you pay while redeeming your investment. The exit load charged depends upon the number of units redeemed and the time at which a redemption request is placed. One also needs to pay attention to the impact on the effective return of your investment. In times of heightened volatility, the rupee-cost feature of SIPs would work best, supporting the function of power of compounding.
Objective of the fund:
While selecting a mutual fund for investment, one of the key rules is to align it to a specific investment. If you are discontinuing your SIP, you are effectively stopping mid-way in pursuit of your financial goals. Yet, this may be justified if the fund’s objective changes mid-way through your investment. For example, if a fund moves from a multi-cap to a large-cap strategy, it may no longer fit your risk and return profile. A change in the fund management, such as change in fund manager or a merger of a scheme with another or a takeover of the fund house itself may mean a change in the style and strategy of the fund and may warrant stopping of the SIP. In such a scenario, it is better to switch to a fund better suited to your goal.
The opportune time to double down on your investments may just be when the markets fall, as you can buy more at lower valuations. Taking a contrarian investing approach during the market fall may be hugely rewarding for your financial future. You may get more units of mutual funds against similar investment during the market fall. As you allow more time to your investments and stay invested, you get the benefit of compounding interest. However, in case you stop your SIP when the market is falling, you will lose out the benefit of compounding for your fresh investments. When the markets move up, the SIP instalments will buy fewer mutual fund units, but the pace of wealth creation will accelerate provided the mutual fund schemes recommended are among the best ones.
Our finances keep changing over time. There could be a time when your income has reduced or unavoidable expenses have surged. Stop the SIP if your funds have taken a hit, leaving very little surplus to invest. Continuing with the investment could mean that you are pushed into debt to meet your regular expenses, which will do more harm than good. If the financial impact is temporary, you can also take a call to pause the SIP for some time till the situation improves and you are able to start investing again without any pressure on your expenses.
Ideally, SIPs should be investments in perpetuity. While the negative returns in your portfolio might be a big reason for you to discontinue your SIPs and even redeem your investments, the decision should not be a knee-jerk one. Like every facility, you should evaluate it periodically and take a call on how to use it so that it can be adjusted to reflect your current situation and work in your favor.