Mutual Fund investment: Why halting your SIPs doesn’t make sense even during market dips

Mutual Fund investment: Systematic Investment Plans (SIPs) are a highly efficient method to realize long-term investment objectives without the need to constantly monitor market timing. In March, India’s mutual fund industry experienced a notable change as 5.1 lakh SIPs were terminated. This surge in closures resulted in an unprecedented stoppage ratio of 127.5%, representing the percentage of SIP closures compared to new registrations. This trend indicates a worrisome pattern where an increasing number of investors are choosing to halt their systematic contributions.

SIPs promote consistent investing habits, discouraging impulsive spending and promoting lasting financial gains. Attempting to predict market movements often results in emotional decision-making, driven by fear and greed. SIPs help maintain discipline and remove emotions from investment decisions through automated contributions. By continuously investing, individuals can benefit from rupee cost averaging, acquiring more units at lower prices and ultimately lowering their overall investment cost. 

“SIPs work on the principle of Rupee Cost Averaging. When markets fall, your SIP buys more units at lower prices. This reduces your average cost per unit. Later, when markets rise, the cheaper units you bought during the downturn give higher returns, improving your overall gains. In simple terms, you buy fewer units when prices are high and more when prices are low. Over time, this helps balance out the costs and improves your long-term performance—especially in a volatile market. You should continue your SIPs even when the market is low because staying invested helps you benefit in the long run,” said Shweta Rajani, Head – Mutual Funds, Anand Rathi Wealth Limited.

Ceasing your SIPs

Ceasing your SIPs may not be a logical decision. A study of the Nifty 50 – TRI index from April 2005 to February 2025 shows that the first year SIP XIRR has varied significantly. Less than -20% of the time, the average XIRR was -36.48%, while more than 20% of the time, it was 43.60%. Despite these fluctuations, the next four years’ average SIP XIRR remained relatively stable, ranging from 11.78% to 15.94%. With a total of 180 observations, halting your SIPs prematurely could mean missing out on potential growth opportunities.

Total observations- 180 – starting from April 2005 – Till Feb 2025

“As we can see from the observation above, in 14% of the cases where someone had invested in an SIP in the Nifty 50 Index for one year and made a negative return ranging from 0% to -20% would have booked a loss. However, holding that investment for another five years would have turned that loss into a positive return of 12.89%. Even in cases where an investor faced an extreme negative return of more than -20% in the first year of their SIP. If the investment was simply held for another 5 years, that initial sharp loss would have turned into a positive average return of 11.78%,” Rajani added.

It is important to note that panic selling often results in unnecessary losses that could have been better managed with patience. Investors should refrain from hastily exiting their SIPs during market downturns. Instead, develop a strategy to build a long-term portfolio that can withstand market volatility. For those with a lump sum to invest, it is recommended to spread out your investments over a period of 4 to 6 weeks to mitigate risks, Rajani added.

Continuing SIPs during market downturns can result in acquiring additional units at discounted prices, setting the portfolio up for growth when the market bounces back. In contrast, in bullish markets, fewer units are acquired, but the portfolio value often increases thanks to higher prices, highlighting the importance of staying invested during volatile periods. By adhering to SIPs, investors can take advantage of both market lows and highs, achieving a more consistent return on investment over the long term.