Mutual funds: Continue SIP to create wealth in long run

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Published: April 13, 2020 1:30:56 AM

If you are facing cash flow issues due to pay cuts, layoffs or delay in salary, you can pause the SIP for one to six months.

The total number of SIP folios rose 2.47 lakh to 3.12 crore clearly reflecting there is awareness among investors.

The sharp fall in the stock markets did not deter individual investors from investing in equity mutual funds through systematic investment plans (SIPs) as inflows hit a record high of Rs 8,641 crore in March as compared with Rs 8,513 crore in February this year. Data from Association of Mutual Funds in India (Amfi) show that SIP inflows were above Rs 8,000 crore for the sixteenth months in a row, and for the first time annual SIP collections touched the Rs 1-lakh crore mark in a financial year to clock Rs 1,00,084 crore in the last financial year.

The total number of SIP folios rose 2.47 lakh to 3.12 crore clearly reflecting there is awareness among investors that an SIP can help them sidestep the behavioural weakness that emerges during volatile market phases and can help them create wealth in a disciplined manner in the long-run. Investing every month ensures that one is invested during the highs and the lows as an SIP will enable an investor to buy units on a given date each month. One of the biggest advantages of an SIP is that the investor doesn’t have to time the market.

SIP ideal when markets are volatile

During markets volatility, SIPs average out the cost. More units are purchased when a scheme’s net asset value (NAV) is low and fewer units are bought when the NAV is high. To be sure, the real benefit of higher number of units is seen when the markets recover and move up. As the 50-share Nifty has crashed nearly a quarter in March, many investors may have thought or may be thinking of stopping the SIPs because of paper loss in portfolio. Experts say that would be a big mistake as these corrections will only help an SIP investor to average the costs. One must continue with the SIPs and if possible increase the SIP amount. In case a particular scheme is under performing for a long time, then the investor must review and switch to a better performing fund or scheme.

A research note by HDFC Securities shows that in the past 34 years (since 1986) there have been six major bear markets—fall of around 40% or more—and every time markets have recovered in next two or three years. In fact, in 2008 when the 30-share Sensex crashed to 8,000 levels because of the global financial crises, the benchmark grew more than fourfold over the next decade. So, if an investor does not need money in the next few years, he should hold on to the investments and continue to invest through SIPs for his various financial goals.

One of the most important advantages of SIPs is the advantage of compounding. One must start investing at an early age as the longer the investment horizon, the bigger the benefits. If you start out young, equity funds should constitute around 80% of your portfolio, as this asset class has been found to be the best bet for growing money over the long term.

Pause SIP in case of cash flow issues

Most fund houses offer the option to pause the SIP for a limited period of time without charging any fee. If an investor is facing cash flow issues due to pay cuts, layoffs or delay in salary, one can pause the SIP for a period of time ranging from one to six months. This ensures that an investor does not have to prematurely close the account and lose on the returns.

Remember, fund houses allow investors to pause an SIP only once during the entire tenure of the investment. However, the duration of the pause will be finally decided by the fund house. After the investor submits the form to the AMC, it will pause the SIP for the period mentioned and resume from the date agreed upon. If the investor has put a bank mandate to the fund house to debit the amount from the bank account through the electronic clearing system, then ensure that the mandate to pause is also given to the bank by the fund house. Always remember to submit the pause form to the fund house a month before the SIP date. This will help the fund house make the necessary changes and activate the instruction.

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