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Do you have an SIP? Don’t stop it!

Many people are considering the option of stopping their Systematic Investment Plan (SIP). Is it a wise decision? Should you stop your SIP? Is it good for your finances? This article finds that out for you!



You started a Systematic Investment Plan (SIP) in a good mutual fund (MF) scheme a year ago.

(To know all about Systematic Investment Plan, please read “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away” and “More on Systematic Investment Plan (SIP) and Micro SIP“)

Initially, the market was going up, and so was the unit price of your MF scheme.

But then, came the crash (or correction) in the equity market, and the unit price of your MF scheme units started going down.

You continue to invest in the MF scheme through the SIP. But you see that the market is not moving up at all – in fact, there is a probability that it would go down even further.

And you are thinking of stopping this Systematic Investment Plan. You are wondering – is it a good idea to continue the SIP, or would it be better to stop it and cut your losses?

(Want to see this analysis through real-life data? Please read “Why you should not stop your SIP when market corrects“)


The underlying principle behind Systematic Investment Plan (SIP)

What is the theory behind SIP? SIP is a tool to implement the strategy of Cost Averaging.

(To know more about Cost Averaging or Rupee Cost Averaging, please read “Cost Averaging”)

In short, cost averaging is a method using which you can overcome the short term volatility of the stock market by investing in stages.

You also forget the biggest worry that most investors face: Timing the market.

Application of the principle of Cost Averaging

You practice the philosophy of cost averaging through an SIP.

You invest a fixed amount every month, irrespective of the level of the market. Thus, when the market is up, you get less units, and when the market is down, you get more units for the same amount invested.

What this does is that over time, it reduces the Average Cost of Acquisition of the units for you.

(Read all about SIPs at “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away” and “More on Systematic Investment Plan (SIP) and Micro SIP“)

With the understanding of these benefits, you started the SIP in the first place. You invested when the market was going up, and you invested also when the market tanked.

Now you are worried, and are considering the option of stopping the SIP.

But has anything really changed to change your decision of investing through an SIP?


A golden opportunity

Nope! Nothing has changed!

In fact, you are currently facing a golden opportunity to drastically reduce the cost of acquisition of your units!

Remember what’s the principle behind an SIP? When the price of the unit is low, you get more number of units for the same total investment, thereby reducing the average per unit cost of purchase.

With the markets corrected so much, surely the price of your units would have also gone down. And that’s exactly why you should not stop the SIP – continue the SIP, so that you get more and more units of your MF scheme for a lesser per unit cost.

Isn’t that why you started investment through SIPs in the first place instead of making a lump sum investment?


Long term outlook for the market

Remember, stock investment is not for the traders or for people who invest for the short term. Investment in equities gives the best returns only in the long term.

(Read “Stocks – The winning bet for the long term” for more details on this)

And although we have a correction today, the long term fundamentals of Indian companies remain very strong. The companies are growing, and are growing very fast.

And even if this growth slows down a little due to the economic turmoil going on today, Indian companies would continue to grow much faster than the companies in most other companies.

Therefore, it makes even more sense to continue the SIP – in the long run, the markets would invariably move up, and at that time, you would end up making a lot more profit because you lowered your purchase cost today!

Conclusion

By continuing the SIP in a subdued stock market, you are reducing the per-unit cost of your MF units, and are therefore creating the platform for a higher profit in the future when the equity market goes up.

So, the message is clear: Do not stop that Systematic Investment Plan (SIP)!

(Want to see this analysis through real-life data? Please read “Why you should not stop your SIP when market corrects“)

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