Market downturns can trigger panic, and many investors react by stopping their SIPs (Systematic Investment Plans) to avoid further losses. However, this decision can do more harm than good in the long run.
One of the key advantages of SIPs is rupee cost averaging you buy more units when the market is down and fewer when it’s up. This strategy helps lower your average cost per unit and enhances long-term returns. When you stop SIPs during a market correction, you miss out on buying at lower prices, reducing the overall benefit when markets recover.
Let’s understand this with an example:
Consider an investor who begins an SIP just two months before a major market correction. As volatility increases, they choose to pause the SIP and resume it only once the market stabilizes. Now, compare this with another investor who continues the SIP uninterrupted throughout the same period.
The outcome? The investor who stayed invested earns higher returns benefitting from the rupee cost averaging principle. As evident from the above table, investors who paused their SIPs during the market correction and resumed after stability missed out on an additional 2%–3% in XIRR, simply by not staying invested through the downturn.
So, when is it acceptable to stop your SIP?
Financial Constraints: If you’re facing a job loss, medical emergency, or any other financial stress, pausing your SIP temporarily can help prioritize essential expenses. However, resume investing as soon as your situation stabilizes.
Goal Achievement: If your SIP was linked to a specific goal (e.g., buying a house or funding education) and you’ve reached the required corpus, stopping or shifting to a safer asset class makes sense.
Portfolio Rebalancing: Over time, market movements can change your asset allocation. If equities have grown disproportionately in your portfolio, stopping an equity SIP and reallocating funds to other asset classes can help maintain balance.
Conclusion
Market downturns are temporary, but wealth creation is a long-term journey. Markets tend to recover swiftly after major corrections, and staying invested ensures you capitalize on these rebounds. Instead of reacting to short-term volatility, focus on your financial goals and trust the process. SIPs work best when given time—let discipline and consistency be your strongest allies in wealth building.
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