One second, the market is hitting the all-time high. The next minute — bam — we are in the pangs of a stock market correction. Market volatility is common and can be triggered by a number of factors. Although history can offer investors with evidences on bull and bear markets, how long crashes last, and corrections have lasted, no one gets a calendar notice declaring the time, nature, and probable extent of future dips in the share market.
The stock market is not the actual economy. Share prices can fluctuate for several reasons. This results in numerous investors with low-risk appetite either redeeming their existing mutual fund investments or stopping their investments altogether. But is it the right choice to stop your SIP investments? Let’s understand this better.
Systematic Investment Plan, commonly known as SIP is generally used as a tool to invest in mutual funds wherein the units of a fund are habitually bought at the fund’s NAV (Net Asset Value). Individuals prefer SIP investment as they help to diminish risks and encourage disciplined financial planning among investors. It also encourages regular investing that helps in wealth creation and verifies to be quite useful for risk-averse investors. By investing in mutual funds via the SIP mode, individuals can competently invest in both rising and falling markets and thereby helping them to derive advantages of unstable and volatile stock markets.
Should you stop your investments in SIP during market volatility?
If you are speculating when to halt your SIP investments, now is not a good time. Terminating your SIP investments during a market downturn is possibly the worst blunder you can make as an equity investor. It overthrows the very purpose of SIPs by refuting the investor the prospect of accumulating more units of mutual fund schemes when the prices go down. The worries and fears of investors are understandable. However, what investors usually miss out is the prospect it offers to them.
A downturn can be the ideal time when SIPs tend to actually work in the investors’ favour. SIP investments tend to work better in a shifting market scenario. As the stock market hits low, it results in the decline in the NAV of funds. This results in an investor buying up more units of the fund at a much lower price. Gradually, as the stock market starts to pick up, the value of your SIP investments tend to fetch more returns as you own more mutual fund units now. This miracle is known as Rupee-Cost Averaging, also referred to as the eighth wonder of the world by several experts. So if you stop your SIPs during this phase, you might not be able to grasp this pleasing opportunity.
While market downturns might initially seem frightening, take a deep breath and recognise that this too will end. This can be overall investment strategy in the long run. If you halt your investments in SIP now or worse redeem your investments, you might turn your temporary loss into a permanent one. Rather, it is a good time to top up your equity exposure in mutual funds through SIP investments based on your risk profile and financial goals. Happy investing!