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should i stop my SIP

Should I stop my SIP

The Indian market has been volatile for quite some time and in this scenario, a simple question that strikes is should I stop my SIP?

If you track the market, you must have noticed that in a matter of a few months the market is again moving back to its 40k + Level. The Market crushed by 40 % in March alone, a fall of 2000 points as normal. All scripts were in the red.

If you invest in the market you must have lost 30-40% of my wealth!!! What to do?

Should I stop my SIP?

This simple question we keep hearing these days. The market is highly volatile, stability is nowhere to be seen. Though you must have noticed a rise in the Stock market, how long they going to sustain the level is doubtful. The fundamentals are yet not strong to support the Sensex figures.

India has been under lockdown for the past five-month, though the process of unlocking has started in phase. The rising number of cases is making revival a distant reality. You are under constant threat of another lockdown if the spread is not controlled.

Under these conditions the question- Should I stop my SIP? This question holds merit and needs to be addressed in detail. So that the right decision can be taken and costly mistakes are avoided.

Before answering this question lets understand what is SIP and why it is important in your portfolio.

What is SIP

Systematic investment plan or SIP as popularly known as are a systematic way of building wealth. In SIP every month you invest a predefined sum of money on a predefined date in a chosen mutual fund.

Every month units are being purchased specific mutual funds, based on prevailing NAV price.

NAV is a function of underlying scripts that are part of that mutual fund. Every day NAV changes. The underlying scripts which constitute the mutual fund, trade on the stock market. The up and down of the scripts get reflected in the NAV.

 Since currently, almost all scripts are bleeding the same is visible in corresponding MF NAV.

Stop vs. Pause

stop vs pause SIP
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You have a few options, you can either put a pause to your SIP or Stop completely. In case of pause you commit, that after some time you would restart the investment whereas in stop it’s completely moving away from the investment.

After deciding on stop vs. pause you have to select between stay invested or withdrawal. In case of withdrawal, you would prefer to take away your money and close the investment whereas in case of stay invested you would let the money participate in the stock market.

Now the big question to be answered, should you stop the SIP or sell off the position and convert holding to cash.

The answer to this question is your personal circumstances. You need to answer for what purpose SIP has been started and for what duration. The chances are high that the SIP must have been started for one of the following goals of life:

a) Retirement

b) Child marriage

c) Child education

d) New house or business etc… varies from investor to investor.

The time period also varies from 5-25 years again depending on what life stage you are. If you have started just a couple of years back in mutual fund your portfolio must be in red and if you have been investing for longer then chances are it must have fallen drastically but still in the green.

Yes, it’s true not all portfolio are in red, though the return is not that high, it gives a reason to stay invested. The market correction should not affect negatively but should be used as an opportunity to have a bigger pie. SIP works best in a volatile market and when the market has a downward bias like today.

Example

Understand mathematically when the market is down the NAV is also down, investment is constant so more units can be purchased and when the market would be favorable these units which were purchased during this time would give maximum return. 

To make things simpler let’s take a simple example. The chart is one of the best MF in the category, HDFC TOP 100.

HDFC top 100

Though its best in its category, it dipped from a high of 164 to a low of 78 during the period of 2008-2009 and again from 353 to 280 in 2015-16. In both cases, it has lost some 40-50%. In both, the scenario the investor had three options either to quit, stay invested, or increase investment. Let’s understand the outcome from the excel of all three scenarios. The current NAV of the fund is 410 Rs. 

HDFC top 100 NAV

Suppose you entered the Market in Dec 2007, by March 2009 your investment is just halved, but the same investment has reaped 150% growth today. As can be seen clearly that the maximum benefit has been reaped for the investments which have been carried when the market was at loss.

In 2009 you had the option either to quit or stay invested. Had you quit you would have not made any money. On the other hand, if you remain invested you would have got maximum number of units.

In the long run, you would have definitely reaped huge returns, in this case, it’s over 400%.

The return would have been much higher had you taken additional investment in this period. These are the chances you would get to increase exposure and return. The current market is such a market.

Conclusion

You should embrace market volatility, take it as an opportunity, and wait for the tide to turn. Because when it does turn, returns can be significant. Therefore, in the current market situation, you should continue your SIPs, review their asset allocation, and invest a lump sum in tranches.

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