Pausing your SIPs amid Covid-induced crisis may hit your financial goals; here's the math

Covid-19 has resulted into massive disruption amongst businesses, education, employment and lifestyle. The pandemic has resulted into standstill of economic life of many individuals on account of loss of jobs, closure of businesses, and lot more. Till date the lockdown restrictions have not been completely lifted, with over a quarter of working population still operating from home.

In such state it has been disastrous for many to even sustain their living let alone allocating savings from any sort of earnings. In addition to that, options such as deferment of EMI, credit card payment, or availing short term loans are being readily explored. Therefore considering survival as primary objective, words like savings, financial goals, SIP etc., took the backstage. This also resulted into stoppage of SIP in order to create liquidity and avoid the risk of volatile market, but has it been the correct decision?

Pausing SIPs
Covid-19 is not going to be with us for the entire lifetime, but the financial goals are set with objectives of a life time. The pandemic has significantly affected the livelihood of many, but like potholes on road do not change our destination, this situation must be looked in a similar fashion. Financial goals, such as retirement, Child education, marriage, car etc., are going to come around despite the presence of this deadly virus, hence it is futile to obstruct its path out of fear. There are many investors who think a temporary stoppage may not impact their goals, so why not stop the SIP until this life comes to normalcy? The answer can be explained with a small example

Mr. A invest 1000 in SIP every month, from which he purchases certain units of mutual fund. Now considering two hypothetical scenario, wherein Mr. A do not stops his SIP in pandemic and in one situation he stops the SIP for three months before resuming again. Now let us compare both the situation to understand the advantages or disadvantages

As seen above mere three months absence can result into nearly a 2% loss in return and thereby confirming pause as a wrong move. SIP returns are determined by the time spent by your investment in market and not by timing your investment according to market scenario. Thus it is clear that SIP should not be dependent upon how the market is, but then when should you begin?

Stay consistent
Time to begin any SIP is not yesterday, not tomorrow but only and only today. The above example is the best possible way to explain that consistency beats market volatility and helps in building wealth for future. Therefore when it is SIP it should be ‘As soon as possible’, however the quantum of investment depends upon objective of the financial goal. For example if the financial goal is child education, which today if costs around 15-20 lakhs, 10 years later assuming 10% inflation rate will cost approximately 35-40 lakhs rupees. A fixed deposit or savings account will not help you accrue 35-40 lakhs in ten years but a SIP might be able to do it. Therefore to accrue 40 lakhs in ten years by assuming 12% rate of return, an approximate monthly SIP of 17,000 should be enough to build your child’s education.

Financial goals
Identical to child education another important financial goal should be retirement planning. To plan for your retirement one must give due importance to his/her lifestyle, because you would not want to compromise in the final stage of your life. Considering you are debt free when at the verge of retirement, your post retirement expense at today’s price let us assume is Rs. 40,000 per month. Now owing to a modest 4% inflation rate after 20-25 years, your post retirement expenses might rise just over Rs. 1,00,000 per month. Considering you may not have any income post retirement, a life expectancy of 20-25 years and around 3% inflation rate during that period, the retirement corpus comes down to Rs. 2.25 Crores. Thus an approximate monthly SIP of Rs. 12000 for 25 years will help you built a stress free retirement.

The above two might be the most common financial goal, which require you to accumulate nearly 2.75 Crores Rupees in a maximum span of 25 years. For many it may seem to be an impossible task, but through SIP route, it can be easily achievable. One may wonder how a niche amount of 10,000 or 20,000 help you build such a huge corpus? Magic? No instead it is called as the power of compounding. Compounding simply means interest earned over interest, thus amount earned on initial investment, remains invested along with the initial investment, and the quantum of tenure multiplies such income in order to create wealth in longer term horizon. Let us check how a monthly SIP amount of Rs. 5000 can help you build a corpus.

Systematic investment plan (SIP) is an investment method wherein an investor in accordance to their preference (daily, weekly, monthly or annually) may choose to invest in mutual fund, in order to achieve their financial goal. SIP has many inherent benefits, of which a disciplined savings method, where a bank ECS mandate helps investors effortlessly create savings in systematic manner. If initiating SIP is effortless, its power to create wealth is second to none on account of its power of compounding. Covid-19 may have created a blockage in the economy of many countries, but it does not necessarily mean the same blockage must be created in achieving your financial goals.

Conclusion
Covid-19 is not here to stay, but your goals are, hence it is impractical to stop your SIP or reassess your investment options. Having said that, it may be prudent to understand your liquidity needs in these tough times and create an emergency fund to cater urgency, however stopping SIP or liquidating your SIP should not be an option for doing it. In addition to that SIP provides you with ultimate route to create maximum wealth in minimum investment amount and achieve all your dreams without compromising on your lifestyle. Thus in this pandemic let the SIP be your mask & sanitizer in order to protect your financial goals.