2019 Mutual Funds

Stopping SIPs?

By Team Niivo On 20 August 2019

 

The markets are trending downwards. The newspapers are screaming that a recession is around the corner. Auto sales have fallen off the cliff. Reliance, the largest Indian firm is becoming financially prudent and cutting debt (possibly all). Real estate has been in a slow-down for a while. Defualts continue to rile the NBFC sector. Globally, a trade war between US and China has dampened sentiments and yields have turned negative on several sovereign instruments. DB has been cutting workforce. As also several global majors. 

On evidence, all of this looks real scary. Any investor will be wary of continuing to invest at the risk of losing hard earned capital. But should you stop your SIPs?

SIPs by definition are "systematic" in nature. Systematic means "according to a fixed plan". Changing a SIP is basically saying you are changing your financial planning. Think very hard before you alter the plan. Ask some basic questions - 

1. How long have you been investing through SIPs?

2. What will you do with the money once the SIP stops?

3. What metric would you use to decide when you should restart the SIP?

I am taking a generic example below to look at the current market scenario using the beaten down BSE MIDCAP chart. 

Midcap stocks performance

 

At current levels, the index has given up all gains since October 2016, that’s almost 3 years.

Now coming to the questions asked previously –

How long have you been investing through SIPs?

People who are most actively thinking of stopping SIPs are possibly investors who have invested during this period of last 3 years. You have no reference of history. If you fall in this category, please be comforted by this chart. The index tested levels of 10,000 around 2008 and then fell post the crisis. It took around 6 years to regain the same levels. But whoever stayed invested then saw the market deliver a return of ~80% over the next 4 years. These type of yo-yo cycles are common.

What will you do with the money once the SIP stops?

Is there a plan for the surplus once you start the SIP. Remember that over time we adjust our spending to the surplus we have over the month. Once a SIP stops, there will be surplus funds that are “uninvested” in your account. Do you have a plan to do something with it? Spend it? Re-deploy in low interest yielding bank-accounts? I will let you think if those options are better in the long term.

What metric would you use to decide when you should restart the SIP?

If you think you can time the market, end your SIPs now and re-enter again, do you have a target in mind? What will that number be when you start re-investing? Will you be okay if the markets take a sharp U-turn tomorrow and start climbing up? Will you enter if it continues to trend lower and if so when – 10% lower, 20% lower or 50% lower? What happens if the index trends side-ways like it did for 6 years between 2008 and 2014 – are you happy to stay put?

Only if you have figured all these responses should you go ahead and stop your SIPs. Else, we would suggest, stick to the plan.