Should I stop my mutual fund SIPs when stock market falls?
Last Updated : March 24, 2020, 5:32 p.m.
SIPs or systematic investment plans are a disciplined way of investing every month or quarter to create wealth over a long period. At this juncture, a lot of people are contemplating stopping their SIPs since returns on SIPs, which started in the last three years or so, have turned negative. So should one stop his SIP now or continue?
Well the answer lies in the premise of why you started the SIP in the first place, in all probability it could have been for the following purposes:
- Child’s marriage or education
- Retirement
- Creating that dream 1 crore corpus or more
- Buying that dream house or car
When you would have started SIPs for any of these goals, the time period would have been 5-10-15-20-30 years away. Most likely you are in the first, second or the third year and getting swayed by all the negative new around and seeing your portfolio in red. We should not get affected by this market correction, in fact, we should use it to our advantage. SIPs work best when markets are volatile especially with a downward bias like today’s.
Mathematically, you buy more units of the same fund through SIPs in times like these since you are buying at lower prices. When the markets turn favourable, these units will give you significant returns in the coming 3-5 years. Let’s understand this better with an example:
Mr. X started an SIP of Rs 10,000 per month in Nov 2019,let’s see what happens.
PHASE-1 This is a time period when stock markets are going down, hence bringing down the mutual fund NAVs
Date of investment | Investment amount (INR) | NAV (INR) | No. of units | Market Value (INR) |
---|---|---|---|---|
10/11/2019 | 10,000 | 50 | 200 | 10,000 |
10/12/2019 | 10,000 | 25 | 400 | 15,000 |
10/01/2020 | 10,000 | 40 | 250 | 34,000 |
10/02/2020 | 10,000 | 25 | 400 | 31,250 |
10/03/2020 | 10,000 | 20 | 500 | 35,000 |
So in these 5 months, he invested Rs 50,000 (Rs 10,000 monthly), accumulated 1750 units (as the NAV dropped, more units got accumulated)and the NAV kept on dropping (from 50 to 20) i.e. volatility on the downside, and after 5 months, his Rs 50,000 were worth Rs 35,000.
But markets never go one way. After every major correction, there is an upswing, let’s call it phase-2.
PHASE-2 The market grows up over the next 5 months and so does the NAV, let’s see how will it reflect on your investment value?
Date of investment | Investment amount (INR) | NAV (INR) | No. of units | Market Value (INR) |
---|---|---|---|---|
10/04/2020 | 10,000 | 25 | 400 | 53,750 |
10/05/2020 | 10,000 | 40 | 250 | 96,000 |
10/06/2020 | 10,000 | 25 | 400 | 70,000 |
10/07/2020 | 10,000 | 40 | 250 | 1,22,000 |
10/08/2020 | 10,000 | 50 | 200 | 1,62,500 |
So in this phase, the mutual fund NAV increases from Rs 20 on 10th March,20 to Rs 50 on 10th August,20. In the second phase, Mr.X accumulated 1500 units. But if you look at his market value now, it has gone up to INR 1, 62,500 on a total investment of INR 1 lakh in these 10 months, generating a whopping 62.50% return.
How did this happen when the NAV in these 10 months is still at Rs 50?
This is a result of market volatility which resulted in a higher number of units getting accumulated during phase-1 and when the NAVs started to increase in phase-2 those units lead to higher returns and more market value for the investment.
Thus, mutual fund investors should embrace market volatility, take it in their stride and wait for the tide to turn. Because when it does turn, returns can be significant. Therefore, in the current market situation, one should continue their SIPs, review their asset allocation and invest lump sum through STPs.