Why Discontinuing/Pausing Your SIPs Isn’t the Best Move in a Volatile Market

November 7, 2024 Mutual Fund

Systematic Investment Plans (SIPs) have long been the go-to investment strategy for retail investors in India. SIPs enable investors to commit a fixed amount regularly into mutual funds, benefiting from cost averaging and fostering disciplined investment habits. Yet, volatile market conditions, both domestic and global, often trigger investors to question the continuity of their SIPs.

As 2024 brings fluctuations in the Indian market, driven by macroeconomic factors such as inflation, interest rate shifts, geopolitical tensions, and significant global events like the upcoming U.S. elections, the environment remains unpredictable. In light of these dynamics, it is essential to understand why staying invested in your SIPs could be beneficial.

Indian markets, like all global markets, go through cyclical phases of expansion and contraction. Volatility often marks the beginning of these phases, presenting opportunities for cost averaging. SIPs enable investors to invest at different price levels, potentially yielding greater long-term gains when the market recovers.

[Read: The Ultimate Guide to the Best SIP Plans for 2025]

Despite the turbulence, India is still seen as one of the fastest-growing economies globally. The government’s focus on infrastructure, manufacturing, and digital innovation positions the country for robust growth over the next decade. Discontinuing or Pausing SIPs during such a period could mean missing out on accumulating units at lower prices, reducing the compounding effect in the long run.

According to the data from the Association of Mutual Funds of India (AMFI), despite the volatility in the markets during the current financial year, the Indian mutual funds have stood at 9.87 crore (98.7 million) SIP accounts through which investors regularly invest in various mutual fund schemes. And the total amount collected through SIPs in the previous month (September 2024) was Rs 24,509 crore.

SIP Fiscal Year Wise Contribution (Amount in INR crore)

Data as of October 31, 2024
(Source: AMFI Annual MF Report) 

Data as of October 31, 2024
*FY 2024-25 data is till September 30, 2024
(Source: AMFI, data collated by PersonalFN Research) 

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Why Halting Your SIP May Be a Missed Opportunity

1. SIP Dilemma

When markets become unpredictable, investors often reconsider their financial strategies, assessing whether adjustments are needed. While reviewing investments regularly is wise, prematurely stopping SIPs can lead to missed opportunities. Sticking with SIPs over the long term helps meet financial goals and builds wealth over time. The power of compounding rewards long-term investors significantly, so halting SIPs after just a few months or years can lead to a substantial opportunity loss.

2. Strength of Consistency

Consistency and discipline are crucial in any successful investment journey, helping simplify financial growth over time. Mutual Fund SIPs, in particular, amplify this effect, allowing investors to steadily accumulate wealth through regular contributions. By continuing SIPs even in turbulent periods, investors can leverage rupee-cost averaging-buying more units when prices are low and fewer when prices are high. This strategy smooths out the impact of market volatility and boosts potential long-term returns.

3. The Pitfalls of Trying to Time the Market

Stopping SIPs during market downturns with plans to restart during a recovery involves attempting to time the market-a notoriously difficult feat. Predicting market movements accurately is challenging, even for seasoned investors. Often, the best-performing days in the market come directly after significant declines, meaning that staying invested allows investors to benefit from these crucial gains.

The most significant mistake investors can make with their mutual fund SIP is halting it during temporary market fluctuations. While it’s natural to feel anxious during these periods, maintaining consistency with the SIP strategy will lead to better long-term results. Investors should prioritize their long-term financial goals and the benefits of compounding, rather than focusing on short-term market movements.

Let us understand with an example:

During the crisis period whether in 2008 or the pandemic year 2020 (COVID-19), many investors panicked as the market crashed, leading them to pause or stop their SIPs in mutual funds. However, those who continued with their SIPs, saw the value of their investments grow substantially in the post-pandemic recovery phase.

For example, Mr A continued his SIP in a diversified equity fund, and by 2023, the fund had significantly recovered from the lows of 2020, earning him returns well above his initial expectations. In contrast, Ms B another investor, chose to pause her SIP when markets fell sharply in early 2020. By the time she resumed her SIP, the market had already begun to recover, and she had missed out on buying more units at lower prices.

As a result, her investment didn’t grow as much as Mr A’s, exhibiting how halting SIPs during volatile periods can lead to missed opportunities.

[Read: Why Stopping Your SIP Based on 1-Year Returns Is Not a Smart Decision]

Table: NAV Performance of Mutual Funds Across Some of the Popular Sub-Categories

Data as of September 30, 2024
Past performance is not an indicator of future NAV growth.
The securities quoted are for illustration only and are not recommendatory
(Source: ACE MF, data collated by PersonalFN) 

In the year 2020, the COVID-19 pandemic triggered a sharp economic downturn, causing significant volatility in financial markets worldwide, including in India. Mutual funds, especially equity-oriented ones, experienced a drastic drop in their Net Asset Values (NAVs) as stock markets plummeted in response to the uncertainty and lockdown measures. This volatility led to a panic among investors, many of whom feared prolonged financial instability. The above table will help you analyse how the NAV of some mutual fund schemes suffered a decline.

During this period, certain categories of mutual funds were hit particularly hard. For instance, equity funds, especially mid-cap and small-cap funds, saw steep declines in their NAVs as companies in these sectors faced severe disruptions in operations and supply chains. Sector-specific funds, like banking and financial services, also took a hit due to concerns over loan defaults, reduced consumer spending, and constrained economic activity.

Many investors, worried about the economic fallout and the uncertainty surrounding the lockdowns, began withdrawing their investments or pausing their Systematic Investment Plans (SIPs). SIPs, which are usually meant for long-term wealth creation, were put on hold by numerous investors in an attempt to preserve cash amid the crisis.

[Read:  Best SIP Mutual Funds with High Returns: Quant Large & Mid Cap Fund vs Bandhan Core Equity Fund]

This mass pause and withdrawal of SIPs, however understandable in the context of the pandemic-induced panic, highlighted the importance of staying committed to long-term investment strategies even during volatile times. Those who continued their SIPs throughout the downturn ultimately benefited from rupee-cost averaging and saw strong portfolio growth when the market rebounded.

Despite the downturn, the year 2021 marked a remarkable recovery. The Indian market rebounded sharply as government stimulus, central bank interventions, and the gradual easing of lockdowns began to restore economic activity. The NIFTY 50 and S&P BSE Sensex surged to new highs as investor confidence returned, propelling the NAVs of many equity funds to pre-pandemic levels and beyond.

For example, large-cap equity funds, which had seen NAV declines of up to 25-30% in early 2020, recovered fully and delivered double-digit gains by the end of 2021. As you can see in the above table, Nippon India Large Cap Fund saw a decline in its NAV by approx. 13% at an NAV of Rs 31.70 from Rs 35.70 in the previous year. Later, the fund recovered substantially at an NAV of Rs 54.23 in the year 2021.

Several diversified equity funds also saw impressive gains. Funds invested in the technology and pharmaceutical sectors, which were resilient during the pandemic, benefited from increased demand for digital services and healthcare products, recording strong NAV growth. Mid-cap and small-cap funds, initially the hardest hit, rebounded powerfully as the market recovery fueled optimism in growth-oriented sectors.

The recovery reinforced the value of staying invested during turbulent times. Investors who continued their SIPs or refrained from redeeming their mutual fund units saw their portfolios regain value and benefit from the upward momentum of the 2021 bull market. This example from 2020 and 2021 highlights the cyclical nature of markets and the advantage of a long-term investment approach that can weather short-term downturns for potential future gains.

To conclude….

Pausing or discontinuing SIPs during market volatility is generally not recommended for long-term investors. While it may seem like a prudent decision in the face of short-term market fluctuations, the strategy often leads to missed opportunities for growth, loss of rupee-cost averaging benefits, and the risk of market timing mistakes.

Investors who stay disciplined and continue their SIPs during volatile periods benefit from the long-term compounding effect, increased wealth accumulation, and the ability to capitalize on market corrections. By focusing on long-term financial goals and remaining committed to their investment strategy, investors can navigate market volatility more effectively and achieve better outcomes over time.

This article first appeared on PersonalFN here