Stopping SIP will devoid you of these benefits!
Many investors get nervous when there are fluctuations in the stock market. In this panic, people withdraw money from mutual funds. Many people stop Systematic Investment Plan i.e. SIP.
Akash had been investing via the SIP route in equity mutual funds for the last 3 years. Since the share market has been experiencing a bull run, his portfolio is in green. But over the last few days, there has been news that the market is set to see a correction, or downfall in the days to come. Due to this, Akash is worried about his growing portfolio turning red.
Just like Akash, many investors are afraid of market volatilities. And as a result, they either stop their SIPs, or redeem their mutual fund investments. But is this the right way? The answer is a big No. Let’s understand why you should not do so.
Through SIPs, or systematic investment plans, investors like Akash invest a fixed amount in any mutual fund scheme on a predetermined date of every month. Just like other markets, the share markets also work in a cyclical manner. Sometimes, the market goes up, and sometimes, the prices fall. But when the market is in a bull run, investors get higher value by means of growing NAV, or net asset value.
Similarly, when the market goes down, investors receive more mutual fund units within their fixed SIP amount. This is also known as rupee-cost averaging. As soon as the market starts going up, the rising NAV of your mutual fund investments would mean higher returns for you.
NAV is the cost at which you can buy or redeem one unit in your mutual fund scheme. Assume that you invest Rs 5,000 in a certain mutual fund scheme. This has an NAV of Rs 200. In this condition, you will be allotted 25 units (5,000/200). Now, if the NAV of this mutual fund rises from Rs 200 to Rs 300 and you decide to sell off your investments at this point, you will get back Rs 7,500 (Rs 300 x 25).
This is why investment experts suggest people to continue their monthly SIPs, despite market volatilities. In the long-term, SIPs can render the impact of market ups and down on your investment ineffective. That is why you should not break or stop your SIPs in fear of markets dipping.
Through SIPs in equity mutual funds, you can create a significant corpus in the long run. The process of beginning an SIP starts with the determination of a long term financial goal like buying a house, funding your kids foreign education, wealth creation or retirement planning.
Depending on the amount of your financial goal and the duration it requires, your SIP sum is ascertained. So, if you stop your SIPs or redeem your investments because of market volatility, not only are you doing injustice to your investments, but you also stand to lose out on achieving your financial goals.
When you stop your SIP, or redeem your mutual fund investments, you are devoiding yourself from harnessing the full power of compounding. You can only benefit from compounding if you continue to invest regularly. Compounding helps you earn higher returns in the long run. You earn returns over your investment plus returns, which gets added every year, leading to an overall increase in your funds.
Lets understand the power of compounding through a simple example. Suppose you invest Rs 2,000 every month in a mutual fund scheme, on which you’ll earn estimated returns of 12% per annum. This way, in 10 years, you will invest Rs 2,40,000, while you will end up with Rs 4,60,000 over this period, which is almost double the investment you’ve made. This is the power of compounding. However, remember that returns in mutual funds are not fixed. It is possible that your returns may rise, or fall.
Whenever the share market experiences a significant downfall, mutual funds are not impacted as severely as shares. This is because mutual fund schemes invest in more than one asset class like equity, bond, gold, real estate and others. If we talk of equity exclusively, investments are made across different market caps and sectors. Even in a single sector, investments are made across different companies.
This means that the strong performance of one asset class balances out the weak performance of a particular asset, sector or share. This is why mutual fund investments do not experience a significant, sudden crash, unlike shares. If, like Akash, you also invest in equity mutual funds via SIPs, do not worry about the market going up or down. Just stay steady in your investments.