Don't lose rupee cost averaging by stopping SIPs; stay focused on goals

The systematic investment plan (SIP) stoppage ratio surged to 109 per cent in January 2025, up from 82.7 per cent in December 2024, according to data from the Association of Mutual Funds in India (Amfi). The rise in SIP discontinuations, outpacing new registrations, suggests a shift in investor sentiment vis-à-vis equities.

 

What led to the surge?

 

Experts attribute the surge primarily to heightened equity market volatility since September 2024. “Consistent market corrections and the amplified noise around them increase the fear of worst-case scenarios,” says Dennis Gabriel, partner, Upwisery.

 

Portfolio reviews also played a part. “At the start of the new year, many investment advisors and distributors review their clients’ portfolios. This can lead to increased SIP stoppages in funds that are not currently recommended, or to rebalance the portfolio,” says Raghvendra Nath, managing director, Ladderup Wealth Management.

 

A technical factor has also contributed. “According to Amfi, the drop in the number of accounts by 25 lakh in January 2025 was mainly due to reconciliation between exchanges and registrar and transfer agents (RTAs),” says Mohit Gang, co-founder and chief executive officer (CEO), Moneyfront.

 

Risks of stopping SIPs

 

Stopping SIPs during a downturn undermines the benefit of rupee-cost averaging. “This strategy allows you to accumulate units at a lower net asset value (NAV),” says Jatinder Pal Singh, CEO, ITI Mutual Fund. Buying more units at lower prices boosts returns when markets revive.

 

Gabriel notes that SIPs work well when continued through one or two market cycles over five to seven years or more. Nath adds that halting your SIPs disrupts the process of compounding.

 

Since SIPs are usually linked to long-term goals, stopping them may derail these objectives, forcing investors to postpone or find costlier alternatives.

 

Stay focused on financial goals

 

Stay committed to your financial goals during market downturns. “If your investment horizon is five to 10 years or more, then short-term volatility should not impact you,” says Gang.

 

It is, however, okay to adjust portfolios. Nath advises investors to maintain an appropriate equity-debt mix based on their time horizon and risk tolerance. For those struggling with current volatility, Gang recommends reallocating to safer categories.

 

Rebalance portfolio

 

Rather than halting SIPs, investors should curtail risk by rebalancing their portfolios. Those overweight on equities, especially the mid and smallcap segments, should consider booking partial profits and reinvesting in segments where they are underweight.

 

If tax concerns deter selling, direct higher SIP flows towards underweight asset and sub-asset classes, like fixed income and largecap funds.

 

When stopping SIPs is justified

 

According to Nath, if a fund’s returns persistently lag behind peers and benchmarks, reallocating to better-performing alternatives is prudent.

 

Liquidity crises, such as job losses or medical emergencies, justify a pause. Singh advises using the pause SIP facility so that investors can restart contributions once they are financially stable.

 

Retirement is another valid reason. Gang explains that while the earlier goal would have been to build a corpus, retirement requires shifting the corpus into risk-free assets to support post-retirement needs.

 

Increasing SIPs

 

Singh highlights that increasing SIP contributions during market corrections enables investors to accumulate more units. However, Nath warns that higher contributions should not strain your budget or compromise emergency funds.

 

Gang observes that market recoveries take time. “Large-cap funds typically rebound first. Mid and smallcap funds experience steeper declines and slower recoveries,” he says. Gabriel adds that increasing SIP allocations in mid and smallcap funds should be considered a long-term commitment.

 

Measures to avoid SIP stoppage

 

·       Prioritise repayment of high-cost debt, such as credit card bills or personal loan payments

 

·       Earning, say, 14 per cent from equities while paying, say, 16 per cent or more on debt is not wise

 

·       Equity SIPs should be in long-term goals

 

·       Maintain an emergency fund equal to six months of expenses and buy adequate medical insurance

 

·       Even if you are forced to pause SIPs, avoid liquidating your equity portfolio