The enthusiasm for investing in mutual funds through Systematic Investment Plans (SIPs) is considerably lower than what the market had witnessed roughly two years before. According to the Association of Mutual Funds in India (AMFI) reports, the total funds mobilised through SIPs in mutual funds in 2020 had gone down considerably compared to the total amount collected through SIPs. While SIP flows contained unabated through the years, the rate of growth in SIP flows was more in the previous years, i.e., in 2019 and 2018. An assessment of monthly data shows a disturbing trend of more people opting to pull out of their mutual fund investments by discontinuing their SIP payments.

Shrinking interest in SIPs

ZFunds (an online mutual fund platform in India) results highlight how the three-year compounded annual growth rate of large caps funds has been 8.85 per cent as on December 31, 2020. Comparatively, mid-cap and small-cap funds grew at 3.82 per cent and 1.43 per cent, respectively. Many people had stopped their SIPs in mid-cap and small-cap fund categories. Raj Khosla, Founder and Managing Director, MyMoneyMantra.com said, “Mid-cap and small-cap funds are more volatile and fall in the high risk-high return category. Post COVID-19, these funds saw a sharp fall and were more severely impacted as compared to large-cap funds. Sharp fall in returns was a major reason for investors stopping SIPs.”

The undulating nature of the stock market has caused many new investors to hold their horses. Many existing investors have discontinued their existing SIPs in favour of registering fresh SIPs for different mutual funds or simply stopped paying for their SIPs fearing further erosion of their capital. The tumbling down of the stock market between March and April 2020 due to myriad reasons including fear of the spread of the dreaded coronavirus had led many investors to witness a notional loss in their wealth. While such market gyrations are temporary, many new investors unable to withstand the market turmoil rush to either stop their SIPs or redeem their investments for further safekeeping.

However, does it make sense to stop investments via SIPs or redeem the existing investments when the market is down? The fact is that when you redeem your investments during the sudden downturn of the market, you are converting your notional loss into an actual loss. Adhil Shetty, CEO, BankBazaar.com said, “Due to the ongoing COVID-19 pandemic, you may be evaluating switching from one instrument to another. For example, you may want to liquidate your mutual funds and park the money in bank deposits. In such a situation, be aware of liquidation costs and applicable taxes.” Mutual funds perform over a long period. The key to returns from equity investments is ‘time’. Many mutual funds have always outperformed post-tax returns from fixed deposits, which is why redeeming them midway when the market is down is equivalent to sabotaging your investments.

The same applies to SIP stoppages in a low stock market. In a low market with investments through SIPs remaining the same, investors benefit from the low NAV of the mutual fund. Radhika Gupta, MD and CEO, Edelweiss Asset Management Limited said, “The concept of SIP is based on rupee cost averaging. This aims to reduce the cost of investments when markets are down. The real benefit of SIP is when markets are down as it buys units at a lower cost and when the market bounces back, it improves the overall return on investment. For example, you start investing when NAV is Rs 100. An Rs 1000 investment will get you 10 units. Now, when the markets fall and NAV is Rs 80, Rs 1000 will get you 12.5 units, i.e., 2.5 units more. This is how you accumulate more units during falling markets which ultimately improve the investor’s returns.”

Consistency is the key

The most likely cause of SIP stoppage is low income due to unemployment or job loss. However, in many cases market volatility has been touted as one of the main reasons for investors to panic and put a stoppage to their SIPs or redeem their investments altogether. Though income uncertainty may pose difficulties in paying off the SIPs, stopping SIPs or redeeming investments when the market is low will only deprive them of potential profits from the investments that they had made. NS Venkatesh, CEO, AMFI reiterates, “The SIP method is an excellent tool for retail investors as it encourages a disciplined, goals-based systematic investment approach. SIPs work best over the long term as they benefit from the rupee cost averaging effect which helps bring down acquisition costs and power of compounding which helps multiply wealth.” Investors should adopt a goal-based approach and short-term volatility should not deter them. They should continue to remain focused on their goals and redeem only once the investment goals are achieved. The decision to exit should depend on whether set goals have been achieved and not on market levels. Stay invested to achieve set financial goals, irrespective of markets being at an all-time high or all-time low.