Why it does not make sense to stop your SIPs mid-way

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A new report from the Association of Mutual Funds in India (AMFI) reported a minor dip in the inflow of SIPs in October this year. But, on the other hand, the total number of SIP accounts increased. For instance, in the quarter ending September 2019, the monthly net SIP inflow in mutual funds was ₹8253 crores. This amount was marginally higher than the figure that ended in the quarter of April 2019, which was ₹8238 crores. Although SIP stoppages have risen 4% and fresh SIPs fell 5.5% over six months, these numbers are too minuscule to set a trend.

Investor maturity

In spite of fluctuating net mutual fund inflows in the past few months, the figure of monthly SIP plans has been refreshingly constant. Financial experts opine that this is an indication that the Indian retail mutual fund investor is showing signs of maturity by staying put for the long-term and not getting easily wavered by market volatility.

Reason for the slowdown

The dip in SIP inflows coincided with a downturn in the Indian economy and instances of bad bonds in mutual fund debt schemes that shuddered investor confidence early this year.

During the first quarter of FY19, the economic growth of the country slid from 8.2% to 5% in the first quarter of FY20. The slowdown subsequently brought down the growth of the economy – from where SIPs originate, and the returns on equity markets – that impact investor confidence regarding equity investments.

What should you do?

Data and statistics regardless, halting SIP investments midway can be a poor tactic for investors looking to gain benefits from the equity market. This is because equity markets provide uneven returns over varying periods.

For example, the Nifty surged 5.32% on 20 September 2019 – its biggest single-day gain in almost a decade after months of negative activity. Prior to the rally, the general five-year return for large-cap mutual funds had slowed down to 7.8%; post the surge, it rose to a decent 9.26%. If you invest in mutual funds, especially equity, stopping SIPs midway can harm your overall returns in the long run.

Through SIPs, you enter the market at different levels, thus making your overall purchase cost low, and increasing your profit margins, on the units you purchase, when markets are weak.

Besides, experts recommend increasing SIP amounts when you invest in mutual funds along with a rise in your income. This can help beat inflation.

If you continue with a flat SIP amount, the corpus amount of your mutual funds’ investment may not be adequate to achieve your long-term goals. Changed expectations can only be met with higher investments which are in sync with your investment goals. Ideally, you should continue with SIPs inequities for ten years or longer to reap the maximum benefit of compounding. You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus.

Conclusion

Thus, even though the mutual fund market may undergo fluctuations, it is advisable not to discontinue your investments through SIP. Moreover, you could increase the SIP to match your revenue hikes to earn inflation-adjusted returns in the long run. If you are a new investor, you can read about what is a mutual fund and SIP finance before you get started. This can build confidence and help you understand the mutual fund market much better.

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