Long-term investors should never stop their SIPs during market corrections.
The systematic investment plan (SIP) stoppage ratio touched a record high of 0.88 in May 2024, much higher than its long-term average of 0.51, according to Association of Mutual Funds in India (Amfi) data.
This ratio indicates how many SIPs were closed for each opened during a month.
Election uncertainty caused spike
Multiple factors caused the increase in the stoppage ratio.
"The market was volatile in the run-up to the elections due to uncertainty around the results," says Alekh Yadav, head of investment products, Sanctum Wealth.
Many investors, he adds, booked profits as mid and smallcap valuations had turned expensive.
Disruptions caused by Know Your Customer (KYC) norms also contributed.
"Investors who had done KYC much earlier without Aadhaar authentication had to undergo the process again," says Vivek Banka, co-founder, GoalTeller.
According to Himanshu Srivastava, associate director, manager research, Morningstar Investment Research India, "Factors like underperformance by certain funds, changes in financial goals leading to reallocation, loss of income or increased expenses, may also have played a part."
When is it okay to stop a SIP?
One good reason is if the fund is underperforming.
"But while evaluating performance, it's important to determine whether it is due to the strategy being temporarily out of favour or if something is structurally wrong with the fund. If it's the latter, move away from it," says Srivastava.
Another reason can be a fundamental change in the fund's prospects or risk-reward profile so that it no longer fits into the investor's portfolio.
A change in the investor's risk appetite can also make a fund unsuitable.
"Personal financial challenges at the investor's end, such as a loss of income or a sudden increase in expenses, can make it difficult to continue contributing a fixed amount at a predetermined frequency," says Srivastava.
Yadav says an SIP may be stopped once the financial goal linked to it is achieved.
"Retirement, relocation (becoming a non-resident), diversifying away from financial to physical assets are other legitimate reasons," he adds.
When not to stop an SIP
Long-term investors should never stop their SIPs during market corrections.
"During a correction, each instalment of your SIP buys more units of the fund, boosting long-term returns," says Yadav.
Srivastava adds that rupee-cost averaging performs best during downturns. Banka says investors should, in fact, increase their investments during corrections.
Risk in switching
Investors should avoid constantly switching their SIPs from one fund to another. One reason is the concept called 'reversion to mean'. Different investment styles gain prominence in different market phases.
For instance, the quality style did well between 2019 and 2021 and value performed thereafter.
"Each fund manager has her own investment style and will underperform when the market does not favour her style.
"If you keep switching your SIP from an underperformer to an outperformer, you will exit a fund that is likely to witness an upturn soon and enter one that may see a spell of underperformance soon," says Banka.
The answer, he suggests, is to build a portfolio comprising different styles, select seasoned fund managers for each, and stick to them for the long haul.
Srivastava points out that frequent switching disturbs compounding. Yadav adds that it impacts returns by giving rise to costs like exit load and capital gains tax.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
