Stopping SIPs during market downturns a big mistake!

Systematic Investment Plans (SIPs) have long been advocated as a prudent investment strategy, especially for those aiming to build wealth over time, without the pitfalls of market timing. However, during periods of market corrections, investors often grapple with the decision of whether to continue or halt their SIPs. Historical data from significant market corrections, such as the 2008 financial crisis and the 2020 COVID-19 pandemic-induced crash, offer valuable insights into the benefits of maintaining SIPs during turbulent times.

The Temptation to Halt SIPs During Market Corrections

Market corrections, defined as a decline of 20% or more in stock prices from their recent highs, can trigger anxiety among investors. The instinctive reaction might be to stop SIPs to prevent further losses. However, this approach is often misguided for several reasons:

1. Missed Opportunities for Lower Averaging: Market corrections allow investors to acquire more units at reduced prices, effectively lowering the average cost of investment. Halting SIPs during these periods forfeits this advantage.
2. Interrupting Compounding: Consistent investments are crucial for compounding to work effectively. Pausing SIPs disrupts this process, potentially diminishing long-term returns.
3. Emotional Decision-Making: Stopping SIPs during corrections often stem from emotional responses rather than rational analysis. Such decisions can lead to suboptimal investment outcomes.

SIPs During the 2008 Financial Crisis

The 2008 financial crisis serves as a poignant example of the resilience of SIPs amid market turmoil. From mid-January 2008 to mid-September 2008, the Nifty 50 index plummeted by 35%. Following the bankruptcy of Lehman Brothers on September 15, 2008, the Nifty lost an additional 25% over the next three months, reaching the 3,000 level by year-end. This period saw investors losing significant portions of their portfolios, with India’s market capitalization halving within a single year.  Business News Today

Despite this severe correction, investors who initiated or continued their SIPs during this period witnessed substantial benefits in the subsequent recovery. For instance, a study analyzing a ₹5,000 monthly SIP in the Nifty 50 Total Return Index (TRI) from January 2008 to January 2013 revealed an impressive annualized return (XIRR) of over 22%. This outcome underscores the advantage of rupee cost averaging, where investors acquire more units at lower prices during market lows, thereby reducing the average cost per unit.  advisorkhoj

SIPs Amid the 2020 COVID-19 Market Crash

The onset of the COVID-19 pandemic in early 2020 led to a swift and sharp decline in global markets, with the Nifty 50 and BSE Sensex indices experiencing significant drops. However, investors who maintained their SIPs during this volatile period reaped considerable rewards as markets rebounded. For example, the S&P BSE 500 TRI, a benchmark for flexicap funds, delivered two-year SIP returns of 39.4% by July 2021. Similarly, the S&P BSE 250 Large & Midcap TRI yielded two-year SIP returns of 37.3% during the same period. These figures highlight the efficacy of staying invested through market downturns to capitalize on eventual recoveries.  Business News Today

Long-Term SIP Performance Across Market Cycles

An extensive analysis of SIP returns over the past two decades, encompassing major market events like the 2008 financial crisis and the COVID-19 slump, indicates that investors who remained committed to their SIPs generally achieved positive outcomes. Notably, the worst-case scenarios for a seven-year SIP in mid and small-cap stocks exhibited only a 5.8% probability of loss. This statistic underscores the resilience of SIPs over extended periods, even in the face of significant market corrections.  Business & Finance India News

Below table summarizes the benefits of continuing SIPs during major market downturns:

Performance of SIPs During Market Downturns

For SIP of Rs 5,000 per month

Key Insights:

• Investors who continued their SIPs during these downturns benefited from rupee cost averaging, buying more units at lower prices.
• The market recovered in all instances, with SIP investors achieving strong annualized returns (XIRR ~15-39%).
• The long-term approach helped overcome short-term volatility and generate higher wealth appreciation compared to lump-sum investments made at market peaks.

The Perils of Halting SIPs During Market Corrections

Ceasing SIPs during market downturns can lead to missed opportunities for wealth accumulation. Market corrections often present the chance to purchase more units at reduced prices, thereby lowering the average cost of investment. Halting SIPs during these periods negates this advantage and disrupts the compounding process, potentially diminishing long-term returns. Moreover, attempting to time the market by pausing and resuming SIPs based on short-term fluctuations is fraught with challenges and often results in suboptimal investment outcomes.

Investor Behaviour During Market Volatility

Investor behaviour during market downturns varies, with some choosing to discontinue their SIPs due to fear and uncertainty. However, data indicates that a significant number of investors maintain their SIPs despite market volatility. For instance, during a period when benchmark indices declined by 6% in February, mutual fund monthly SIP inflows decreased by just 2%. This resilience suggests that many investors recognize the long-term benefits of continuing SIPs through market corrections.  

Conclusion

Historical data from significant market corrections consistently demonstrates that maintaining SIPs during such periods is advantageous for long-term wealth creation. The principles of rupee cost averaging and the power of compounding work most effectively when investments are sustained through market cycles, including downturns. Investors are, therefore, better off adhering to their SIP commitments, viewing market corrections as opportunities to enhance their investment portfolios rather than as signals to withdraw.