Why investors should continue investing in SIPs even in a bear market

A standard pitch from investment experts and mutual fund managers is – invest through systematic investment plans (SIPs) in diversified equity funds to create a retirement corpus. The popularity of SIPs or Systematic Investment Plans has gone up in the last couple of years. The recent fall in the equity markets has seen some investors getting negative returns on the SIPs. This raises the question as to whether SIP should be discontinued during bear phases of the markets.

The philosophy behind starting a SIP with an equity scheme is to go on investing regardless of the market conditions. Investors should not stop it in downturns, but should keep the SIP running for a longer period. Otherwise, they will lose out on the chance to make money in the long term. Here’s why:

  • Rupee cost averaging: The concept of rupee cost averaging lies in averaging out the cost at which you buy units of a mutual fund. The equity markets have always been volatile reflecting the ups and downs of the economy.Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more shares of an investment when prices are low and less when they are high.. However, this mechanism doesn’t guarantee a profit or eliminate risk, and it won’t protect you from a loss if you sell shares at a market low. Before adopting this strategy, you should consider your ability to continue investing through periods of low price levels.
  • Power of compounding: .Compounding means that the money you make off an investment can be reinvested to make even more money than your initial investment.. Essentially, compounding is the process of earning income on your principal investment plus the income earned – the income also starts to earn as the same is reinvested.

In conclusion, investors shouldn’t worry about stopping SIPs when the market is declining. In fact, that is the period when an investor can accumulate more units at a cheaper cost and then benefit from the eventual up move in the markets. SIPs are done by investors to meet long-term goals and should be done for at least 5-10 years. They should not be worried about near-term volatilities or small negative returns in the near-term. Corrections are the best time to accumulate maximum numbers of units for the future. In fact investors can use this opportunity to increase SIP amount by using a top-up facility provided by the fund house.Invest NOW

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