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Why Mutual Fund Investors Should Not Stop SIP

  April 13,2023

Why Mutual Fund Investors Shouldn't Stop SIPs In This Economic Slowdown

With the looming recession fears, many investors are pausing their SIPs. It has also been historically observed that investors tend to stop their SIP investments during an economic slowdown. However, if you look at the mutual fund returns from 2008 till now, a recession can be the best time to invest in the market. So, if you are thinking about stopping or pausing SIPs for a while, you need to read this article.

How can SIPs help in a recession?

Recession is never welcomed. However, if you are investing in mutual funds via SIPs, an economic slowdown can be a boon for you. The most important aspect of investing via SIPs is rupee cost averaging. This term refers to investing practice that involves investing an equal sum on a particular date without worrying about the fund's unit price. This is when you do not try to time the market but regularly invest a certain sum of money and stay invested for a longer time to reap the benefits.

To understand this better, let’s look at how rupee cost averaging works:

Months

Amount invested

Per unit price

Number of units bought

15th January

Rs. 10000

100

100

15th February

Rs. 10000

95

105.26

15th March

Rs. 10000

90

111.11

15th April

Rs. 10000

85

117.65

15th June

Rs. 10000

89

112.36

15th July

Rs. 10000

92

108.70

 

Suppose you started investing in this (say) fund A in January, and the date of SIP investment you set is the 15th of every month. However, due to the recession, markets started to tank, and unit prices kept going down, then they started to revive in the 5th month, June. Now, take a close look at the number of units you get when the price goes down. As the price went down from Rs. 100 per unit to Rs. 95 per unit, the number of units received went up from 100 to 105.26. This example depicts the benefit of staying invested even when the economy slows down. As a SIP investor, when the prices go down, you should stay invested rather than pause your SIPs, as you will get more units than when the prices are soaring.

Now let’s compare it with lump sum investment to understand another benefit of SIP: risk mitigation. The total sum invested in the six months is Rs. 60000 divided into equal parts over 6 months. Now, if you had invested this total amount on 15th January, the total number of units you would have received was Rs. 60000/100 = 600 units.

At the end of the 6th month, you have a total of 655.08 units, as you invested via SIPs. So, you achieved a clear profit of 55.05 units just by breaking down your investment into small parts. This also reduced the risk to quite an extent, as you didn’t put all the money in the fund immediately.

Why do you stay invested for the long term while investing via SIPs?

Now you know why you shouldn’t stop investing during the economic slowdown, so next, let’s find out why you should stay invested for a longer tenure to reap better returns.

Suppose you and your friend started investing in the same fund, say, Fund X, on the same date and the same amount of Rs. 10000 every month. However, you stopped the SIP after five years due to the recession, while your friend continued it for ten years. Now let’s take a look at the returns:

Particulars

You (5 years investment)

Your friend (10 years investment)

Total Investment

Rs. 600000

Rs. 1200000

Returns (@12% rate)

Rs. 224864

Rs. 1123391

Total value

Rs. 824864

Rs. 2323391

 

The returns and total value of your friend who stayed invested for ten years are higher than yours. You may say that you invested half of your friend, which is true. However, you haven’t achieved half of the returns generated by your friend while you have invested half of what he did. This is due to the computing of returns which helps in the growth of the returns when you stay invested for a longer tenure.

Conclusion

While the recession is something to worry about, if you plan your investments thoroughly and stay invested and regularly monitor the investments, recession can also benefit you in the long term.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

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