Should You Stop SIP During Market Downfall or Continue for Potential Gains?

 Understanding the Impact of Market Volatility on Systematic Investment Plans

Introduction

The market has been experiencing a downturn since October 2024, with the large cap index (Nifty 100) dropping by approximately 11%. Midcap index (Nifty midcap 150) is down by ~13% & Small cap Index (Nifty Small cap 250) down by ~17%.

Despite this decline, Mutual Fund Systematic Investment Plans (SIPs) have shown resilience, with no major impact on their performance. This raises an important question for investors: should one stop SIPs during a market downfall or see this as an opportunity to continue and potentially benefit from lower rates?

Understanding SIPs and Market Volatility

Systematic Investment Plans (SIPs) allow investors to invest a fixed amount of money at regular intervals in a mutual fund scheme, typically monthly. This approach helps in averaging the cost of investment and mitigating the impact of market volatility. During market downturns, the amount invested through SIPs buys more units at lower prices, thus potentially enhancing returns when the market recovers.

Historical Data: Lessons from the Past Decade

Investors can draw valuable insights from historical market data to understand the potential benefits of continuing SIPs during market downturns. Over the past decade, the Indian stock market has experienced several phases of volatility. Here, we examine some key instances and the resulting impact on SIP investments:

2010-2011: European Debt Crisis

During the European debt crisis, the Indian market saw significant volatility, with the Nifty 50 index dropping by around 25% between November 2010 and December 2011. Investors who continued their SIPs during this period benefited from lower average costs, as the market eventually recovered, climbing back up by over 40% by the end of 2012 for large cap indices.

2013: Taper Tantrum

In 2013, the market faced another setback due to the US Federal Reserve's announcement of tapering its quantitative easing program. The Nifty 50 index fell by approximately 11% between May and August 2013. Investors who maintained their SIPs during this phase saw their investments grow significantly when the market rebounded, achieving a 30% increase by mid-2014 for large caps.

2015-2016: Chinese Stock Market Turbulence

The Chinese stock market crash in 2015 caused global market unrest, impacting the Indian market as well. The Nifty 50 index declined by around 15% between March 2015 and February 2016. Investors who continued their SIPs during this period reaped the benefits when the market bounced back, with the index rising by nearly 20% by the end of 2016 for large caps.

2020: COVID-19 Pandemic

The COVID-19 pandemic led to an unprecedented market crash in early 2020, with the Nifty 50 index plummeting by over 35% between January and March. However, investors who persisted with their SIPs capitalized on the market recovery, as the index surged by more than 70% by the end of the year for large caps.

Why Continuing SIPs During Market Downfall is Beneficial

Rupee Cost Averaging: Continuing SIPs during a market downturn allows investors to buy more units at lower prices, reducing the overall average cost and leading to higher returns when the market recovers.

Power of Compounding: SIPs benefit from compounding, generating further returns over time. By maintaining SIPs in downturns, investors enhance long-term wealth creation.

Disciplined Investing: SIPs encourage regular investment regardless of market conditions, helping investors avoid the pitfalls of market timing.

Emotional Control: Continuing SIPs during market downturns helps investors stay focused on long-term goals, reducing the impact of emotional decision-making.

Conclusion

History has shown that market downturns are temporary, and the market eventually recovers, often reaching new highs. For investors, continuing SIPs during market downturns can be a prudent strategy, allowing them to accumulate more units at lower rates and potentially achieve higher returns when the market rebounds. The key is to remain patient, disciplined, and focused on long-term financial goals. Rather than seeing market downturns as a reason to stop SIPs, investors should view them as an opportunity to strengthen their investment portfolios and capitalize on the benefits of lower prices and market recovery.

According to the latest data from the Association of Mutual Funds in India (AMFI), SIPs have remained remarkably stable, averaging around 26,000 crores per month over the past three months. 

This stability indicates that investors are becoming more astute, not allowing current market declines to deter them. Instead, they are using mutual fund investments to achieve their long-term financial goals.

 

This article has been created for knowledge-sharing purposes. Please consult with your financial advisor before making any investment decisions

By Ritesh Chaturvedi