Why you should not stop SIP when Stock Market is down?

Systematic Investment Plan (SIP) is a mode of making regular investment in a Mutual Fund. SIPs are largely made in Equity Oriented Funds in India. SIP is a flexible option in which an amount is auto debited from your bank account on a regular interval and is invested in a mutual fund you have selected, against this investment units of that mutual fund are allotted to you.

SIP not only inculcates a habit of regular savings but it also creates a handsome wealth in long term for the investors. That is why discipline and consistency are very much needed for achieving your long term objective via SIP investments.

SIP can simply be understood as smaller periodic investments instead of a one-time lump sum investment. You are free to figure out the amount you need to invest in an SIP on a regular basis to meet your financial goals.

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Reason to Start SIP

SIPs are attractive because of following 3 major reasons:

1. Regular Saving: You inculcate a habit of regular saving, regardless of its amount. It helps in creation of wealth for you. It helps you achieving your long term goals like higher education for your children, purchase of car, going on a foreign trip, marriage of children, etc.
2. Rupee Cost Averaging: As the amount is invested on a regular interval, it helps in averaging of cost for you. Sometimes the stock market is up and sometimes the stock market is down then you will get average cost of your investments made through SIPs. This is not possible in case of a lump sum investment made in a mutual fund. Investors don't have to worry about when to invest, how much to invest, etc. looking into daily market movements, as SIP investment reduces these risks significantly.
3. Power of Compounding: In SIP, you will get the benefit of compounding which means that the returns on the investment become a part of the investment and start generating returns, therefore, profit starts increasing at a much higher pace over a long period. Longer will be the term, higher will be the returns. Power of Compounding is called the 8th wonder of the world.

Why you should not stop SIP when Stock Market is down?

Sometimes the investors think that if the market is declining then they should stop investing as the risk in the market is increasing. They feel that SIP should be stopped till the market is down and when the market will start going up, they will start their SIP again.

This idea is absolutely wrong. One must understand that he/ she is not making any lump sum one time investment for which he/ she has to look at the market. SIP is basically a regular investment for a longer horizon. Here regularity means a lot. Those who make steady investment in SIP without looking into the market conditions only get benefitted in actual sense.

Further, it is prudent not to stop SIP when the stock market is declining as the NAV or per unit price of the SIP investment will come down and the investor will get more units for the same amount of money. This will help making average cost of SIP investment lower.

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Investors have to keep in mind following points while investing in SIP:

• Nobody can time the stock market
• SIP acts as a powerful tool to fight stock market volatility
• Investment risk, in case of an SIP, is spread across market movements
• SIP has an immense potential of compounding over a long period of time

You should not discontinue SIP as there is no reason for you to worry about the market movements. You should focus on continuing SIP for a longer time in the stock market linked mutual fund rather than timing the stock market.

If you stop SIP when the stock market is falling, then the main purpose of SIP will be defeated. One must remember that the long term trend of the stock markets of developing countries like India remain positive. He must be happy, if currently the market is down and he is continuing with SIP as he will get more units. Remember, falling markets always help you in averaging out your buying price in SIP.

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Share This : Anupama is a Co-Founder of CodeForBanks.com. She is an MBA (Finance) and Chartered Financial Analyst (CFA). She also carries a Fellowship degree in Life Insurance Sector and is a Master of Computer Application (MCA). She is an expert in Finance Field with an experience of over 18 years on different managerial positions in finance industry including Stock Market, Depository and Mutual Fund Sectors. Apart from that she has remained for few years in the field of marketing as well. Her suggestions and advice for investments have been very useful to many people.
Her vast interest & expertise in the field of finance have encouraged her to write the articles so that others can also get benefitted out of them. She never loses any opportunity to learn and be creative. She is a valuable asset for CodeForBanks.com & important resource to all those around her.