Don’t Stop Your SIPs

SIPs benefit from stock market downs and ups. Don’t let this down market cycle influence your decision to stop investing. Take a pause instead.

Over the years, investments through SIPs (systematic investment plan) inequity mutual funds have become the new norm. The undisputed convenience and simplicity has without doubt acted in favour of this technique to invest.

Other advantages such as compounding and rupee cost averaging have been widely understood by long term equity investors who prefer investing in mutual funds through the SIP way. Several investors have benefited from regular long-term investments and the number of such investors is only on the rise. Yet, there are many people who are new to investing, who do get anxious every time the stock markets fluctuate.

The anxiety experienced by new and even some seasoned investors during a volatile stock market phase are understandable. Instinctively, the first reaction of such investors is to panic and redeem their investments. Many others stop their future SIP instalments. Both the actions are uncalled for, going by how the stock markets have fared over the years. When one redeems SIP investments prematurely, they may incur an exit load as well as capital gains tax, which further impacts the worth of their investments.

Likewise, stopping SIPs, especially when investing for the long term is a bad idea. Investing towards a financial goal helps you break down your investments over a period of time in a small and steady manner, which makes SIP investing suitable to achieve financial goals. With most investments tied to long term financial goals such as retirement, child’s education or buying a house in the future; any decision to stop investments would impact the goal.

You may either fall short when you need the money or the goal needs to be adjusted. Some goals may also be non-negotiable such as child’s education, which cannot be pushed by a few years unlike retirement where one could extend their work life by a few years to adjust to change in the goal value. So, before you stop SIPs, think how the action will impact the goal for which the investment was initiated in the first place.

Long-term investing and short-term pains

Think of long-term investing as the progress of a child from birth to adulthood. Just the way a small child learns to form words and sentences or learns to walk with a fair share of falls before they start running; investing in equities is also satisfyingly profitable with its cycles of falls and rise. Take for instance, the journey of the S&P BSE SENSEX Values over its more than four decade history – it has had its share of gains and losses over many short-term and medium-term phases. We have witnessed a stock market fall so far in 2020, owing to the Corona virus or Covid-19 pandemic.

Investing in equities is advisable when it is done for the long term with a clear timeline and target goal in place. If you look at the way the S&P BSE SENSEX has moved from January 2001 to March 2020 (See: S&P BSE SENSEX over different health alerts), there have been several health-related scares. There was SARS pandemic in 2002, Swine Flu in 2009, Zika Virus in 2016 and others. A casual observation indicates that there are short period of market turbulence and falls, but over the long period of 5-, 10- or 15-years; the stock market indices have only gone up.

Futile to cancel SIPs in the short run

There are many disadvantages of cancelling or stopping SIPs. To understand the impact of such moves, let us consider a few scenarios from the accompanying graph. Let us assume one invested ₹5,000 through monthly SIPs in the S&P BSE SENSEX from Jan 2001 to April 2020; a period of 19 years and 4 months. The total investment in this period works to ₹11.4 lakh and its worth ₹36,62,357 earning 10.83% SIP returns (XIRR).

Now, this period had several dips and gains and months when the SIP investment value was lower than the invested sum. This is an eye opener for many seasoned investors who wrongly assume that the SIP investment value can never turn negative. Today, some investors may be seeing the value of their SIP investments fall below the investments made. Such investors may consider exiting or stopping the SIPs; they should not take such a hasty decision.

Let us consider the investment period from January 2005 to December 2009; a five year period when the value of S&P BSE SENSEX index jumped three times. It was also the period when the markets witnessed a global financial crisis in January 2008, and between Jan-Oct 2008, the S&P BSE SENSEX witnessed a massive 58% fall. The S&P BSE SENSEX was 20,300 on Jan 1, 2008 and ended at 8,509 on Oct 27, 2008.

An investor with monthly SIP investment of ₹5,000 in the S&P BSE SENSEX from January 2005 would have reasons to worry when his investments in January 2009 were lesser in value compared to his investments (See: Table 1). If this investor had exited at this point it would have been a loss. However, just 12 months later, his investments would have risen and earned a handsome 18% SIP returns (XIRR) over the five year investment period.

Let us consider another scenario between January 2014 and December 2018. A monthly SIP investment of ₹5,000 in this period would have dipped in value in January 2016. Again, in this scenario too, if the investor had stayed invested and not exited, the investments would have grown significantly within a year. At the end of the five year period, the investment is effectively worth ₹3.79 lakh on an investment of ₹3 lakh at 10.55% SIP returns (XIRR). Investors can take a lesson from being patient when investing in the stock markets for the long term and stay invested through the course of the investment period. But there are instances when one may find it difficult to continue SIPs owing to cash flow problems or the anxiety may be too high. In such a context, a feature with SIPs which often gets missed is the flexibility to take a break from investing by opting for the SIP Pause facility.

What is SIP pause?

Some AMCs allow you to take a break from regular SIP investing with the SIP Pause feature. The SIP Pause feature is temporary and is usually for a period of up to three months for monthly SIPs and once in case of half-yearly or yearly SIPs. After this, your SIP restarts automatically. However, this differs from fund house to fund house. In general, the SIP Pause facility can only be availed once in the lifetime of the fund. For instance, if you were investing ₹5,000 through monthly SIP in a fund from January 2019, and in February 2020, decided to take a break and pause your SIP in March 2020

To initiate a SIP pause, you need to inform the AMC and fill up a SIP pause form. You should provide substantial notice to take a gap in SIP investment and not rush for a pause a few days prior to the SIP investment date, because a pause may come into effect only after a month or even two. The reason for such a delay is because sometimes, the communication between the AMC and the bank for direct debit may take longer or skip the SIP date before registering for SIP pause.

And, if you are investing directly through an AMC; you could communicate to the AMC whose fund you are investing in to pause your SIP. Taking a pause is better than stopping your SIP because restarting a paused SIP is far more convenient and easier than restarting a stopped SIP. In this way, you can continue your habit of disciplined investments once the pause duration ends.

Investors could contact their advisors or reach out to the AMC to execute an SIP pause. Instead of completely stopping their investments; they could reduce the amount of SIP they commit. This process would entail stopping the existing SIPs and restarting a new one by filling up requisite forms. This process would ensure that regular investments continue, even though it would be lesser.

A timeless lesson to remember with SIP investment is that it is a friend when it comes to long-term investing. Just the way today, we are advised to stay home and stay safe; stay invested with SIPs to achieve your financial goals.