Why continuing your SIP during market downturns is a good idea

The year 2020 has been progressing in the most unexpected manner, to say the least. The COVID-19 outbreak has resulted in most countries undergoing a lockdown thereby resulting in economic and financial activity coming to a grinding halt.

The result of this outbreak was a sell-off across all asset classes such as bonds, equities, gold, currencies, and commodities as uncertainty persists over the spread of the virus. Indian markets have seen benchmark indices such as S&P BSE Sensex correct by almost 10,000 pointsand has made retail investors nervous and skeptical about continuing with their investments.

Given the nervousness and uncertainty, many investors tend to either stop their SIPs or redeem the invested amount at a loss when the markets enter a state of panic.Due to the sharp declines in equity market valuations, you could be witnessing negative returns from your SIP investments. This may worry you and prompt you to stop your SIPs and encash your investments, with the hope to start afresh once the market recovers.

However, continuingwith your existing SIP can help use the ongoing correctionto youradvantage and turn it intoan opportunity for potential long-term wealth creation.Some of the reasons which support continuing an SIP during market downturns are as follows:

Rupee cost averaging: One of the biggest benefits of SIP investing is the advantage of rupee cost averaging. This simply means you can buy more units when markets are lower,and vice versa. Markets go through a cycle and every downturn is followed by an upmove. When NAVs fall, your SIP ends up buying more units, but as NAVs increase your SIP buys fewer units. SIPs being regular periodic investments, over time you end up accumulating higher number of units at a much lower cost as compared to a lumpsum investment made at a certain point in time.

SIP makes market timing irrelevant: One of the biggest dilemmas before an investoris determining when to invest.Investing in amutual fund via SIP helps us overcome the problem, asinvestments are made on a pre-determined date irrespective of the state of the market. This means you are constantly investing smaller amounts on a regular basis. Also, as explained in the point above, SIPs are effective during both good and bad market cycles.

Effect of Power of Compounding: It is said that compounding is the “Eighth wonder of the world”. The power of compounding refers to the ability of the interest you receive to earn more interest. Essentially, compounding takes place when the interest you earn is added to your initial investment and then that amount earns interest which is again ploughed back to the investment amount, and so on. During a bear phase in equities,higher number of units can be accumulated at a lower price as NAVs fall. When the markets start moving higher, the cumulative value of investments will be much higher on account of higher number of units acquired during the bear phase. This helps to grow your wealth in a staggered and steady manner.

One can never be sure about theextent of market correction, or how long will it last. As an SIP investor you should, thus, ignore the short-term negative returns that your investment may earn during falling markets. Investorsare better off staying invested over the course of entiremarket cycle and using the market correction to their advantage.Market movements may be volatile and unpredictable, but your financial goals are not. So, you should stick to your investment plan and stay on track to achieving your financial goals and focus on long-term wealth creation.

Post Author: Alison Lukas