Should You Stop SIPs in the COVID-19 Pandemic? Know Here…
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In the recent ongoing, extended lockdown environment, people are rethinking their investment decisions, either redeeming their mutual fund investments, or discontinuing or pausing their Systematic Investment Plans (SIPs).
Most of the mutual fund houses are allowing their investors to pause their SIPs. Recently a friend told me that he has paused his SIP.
"Aditi, the extended lockdown has left me worried and I don't think continuing with SIP is a good idea, as I would rather keep that money in my savings account to use for emergencies like this."
I explained to my friend, "If you already have a contingency fund, you shouldn't be worried for emergencies like this, so stopping SIP would be an imprudent thing to do."
"Why its imprudent?", he asked.
"Why did you begin SIP", I counter questioned him.
"SIPs work on the simple principle of investing regularly in a disciplined manner to build wealth over a long period of time" he replied.
Image source: freepik. com
"That's correct, with SIP mode of investment, your money is deployed in a mutual fund scheme, in a series of consecutive payments of pre-determined amounts made after a defined period. Due to the averaging of costs and the power of compounding, SIPs makes for a smart investment option without you having to time the market."
I went on to explain that if the market dips, you can buy a higher number of units.
Consider this, you invest Rs 1,000 every month for the next 12 months in a mutual fund with a starting NAV of Rs 100. Over the course of the year, the NAV of the scheme dips by 10% to Rs 90, soon there is an uptrend in markets then the NAV ends up at Rs 110 at the end of the 12 months. A simple calculation reveals that the NAV of the fund has grown by 10% in one year. How much has the investment through the SIP grown?
Table: Here's how rupee-cost averaging works
| Month |
NAV (Rs) |
Units Purchased Via SIP |
Units purchased with pause in SIP |
| 1 |
100.00 |
10.00 |
10.0 |
| 2 |
105.00 |
9.52 |
9.5 |
| 3 |
103.00 |
9.71 |
9.7 |
| 4 |
100.00 |
10.00 |
10.0 |
| 5 |
97.00 |
10.31 |
10.3 |
| 6 |
98.00 |
10.20 |
SIP paused |
| 7 |
95.00 |
10.53 |
SIP paused |
| 8 |
90.00 |
11.11 |
SIP paused |
| 9 |
95.00 |
10.53 |
10.5 |
| 10 |
99.00 |
10.10 |
10.1 |
| 11 |
100.00 |
10.00 |
10.0 |
| 12 |
110.00 |
9.09 |
9.1 |
| Total Units |
121.10 |
89.3 |
| Final Value |
Rs 13321.17 |
Rs 9818.6 |
Data only for illustrative purposes
(Source: PersonalFN Research)
Over the 12-month period, you have invested Rs 12,000 and in turn picked up 121.10 units. At the end of the year, these units are worth Rs 13,321 (NAV Rs 110*121.10 units). The gains work out to 11% ([13321-12000]/12000). During downfall in the markets, you were able to average out your initial investment cost. In this example, the average NAV cost works out to Rs 99.33.
Thus, even though the market had dipped significantly, it averaged out your costs and benefited from returns as soon as the market moved up.
But if you paused your SIP for three months from 6th month onwards and resume from the 9th month you invest less and pick up 89.3 units at the end of the year. These units are worth Rs 9818.6 (NAV Rs 110*89.3 units), and you lose Rs 3502.57.
So, broadly, with SIPs timing the market becomes irrelevant. What matters is "time in the market" and not "timing the market", as the latter could prove hazardous to your wealth and health.
[Read: Best Mutual Funds for SIP in 2020]
In these testing times of the COVID-19 lockdown, people should be engaging in a serious budgeting exercise. This can help one continue with SIP for long-term financial wellbeing and to achieve the envisioned goals.
[Read: 5 Valuable Money Management Lessons from the Coronavirus Pandemic]
He thanked me and before we ended the call, I reiterated the following points:
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Investing in Mutual Funds through SIPs can help one accomplish financial milestones in the right way. It is a wonderful option that besides growing wealth also helps in developing patience, focus, and discipline, i.e. good habits.
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To keep your eye on the long-term objective; the longer your investment horizon, the higher will be your scope to build wealth from the market. Hence don't let your emotions influence your decisions in the short run.
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Before investing in any mutual fund don't forget your financial goal, risk ability, investment time horizon, and your financial position.
-
Do consider qualitative and quantitative parameters when selecting the right mutual fund suitable for you.
Conclusion:
Remember, SIP is only a method of investing in mutual funds. To support this investment method, you also need to pick the right mutual funds that can help you achieve your financial goals. So, make prudent investment decisions to gain the most from your investments.
However, pausing SIPs will be an imprudent thing to do when markets are volatile (and may correct further). Rupee-cost averaging would be defied and compounding will be hindered.
Selection of right mutual fund schemes isn't an easy task. It requires a lot of skill and effort. Depending on friends and family members for advice might cost you your financial goals.
To fight COVID-19, the best remedy is prevention. Take good care to build immunity, eat healthy food, exercise moderately, stay home, and stay safe.
PS: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. We have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Click here to get access to the report.
Warm Regards,
Aditi Murkute
Senior Writer
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