Why Cancelling SIP Within a Short Term Is a Bad Idea?

When it comes to investing in mutual funds, most retail investors prefer investing through SIP (Systematic Investment Plan). It gives the flexibility to invest a small amount regularly and build a corpus in the long-run. But many people who start investing with gusto and enthusiasm initially, tend to give up within a few months of making a start and cancel SIPs.With the onset of the COVID-19 pandemic and the subsequent dip in the market brought fear amongst the investors and many people cancelled their SIPs and redeemed their units to prevent losses. However, experts suggest that such knee-jerk reactions defeat the whole purpose of investment. Remember, mutual funds are essentially a long-term investment product. The longer you stay invested, the better your chances of getting high returns.If you are a first-time investor, here a few reasons why you must not cancel SIP within short period:

Investing in mutual funds is not about setting aside a part of your income towards specific goals, but it is about enjoying the journey towards attaining the goal. If you decide to stop the SIP due to the falling market condition, you effectively stop mid-way in pursuit of your goal. So, it is advisable to stay invested in the funds long and continue to invest through SIP so that you can stay on track of achieving your end goal in a time-bound manner.

Many first-time investors tend to wait for the right time to invest in mutual funds . When the market falls, the value of the funds dip, and it becomes relatively comfortable to invest. However, experts recommend that you should not be affected by such timing bias as it may deter you from making fresh investments due to the fear of loss.Instead, you must continue to invest through SIPs, irrespective of the market ups and downs. Investing at a lower value allows you to get a higher number of fund units, which can also help you average out the investment cost.

Investing in mutual funds through SIP is one of the best ways to be financially disciplined. As you continue to invest in SIPs, over a period, you allow your funds to grow and with the power of compounding, you can generate significant returns in the long-run. In compound returns, the returns earned on your existing investment continues to earn returns for as long as you stay invested.Thus, you may lose the opportunity to gain valuable returns if you cancel SIP within a short period.

As an investor in mutual funds, you must understand that even though the market tends to be volatile over a short period, they carry immense wealth creation potential in the long-run. This is reflected by the historical performance of the markets; over the last 40 years, investors have generated about 16% returns.As such if you cancel SIP when the market is low, you may lose out on the opportunity to earn higher returns during the market rallies.

While you may look for alternative investment avenues after you cancel SIP, it is advisable to continue with the SIP as you can benefit from the professional fund management of your hard-earned money. The expert fund managers use their vast knowledge and experience about the different funds and market movement to make investment decisions and generate valuable returns for you.

Warren Buffet once said, “you must be fearful with others are greedy, but you must be greedy when others are fearful.” This quote aptly sums up the importance of continuing to invest in SIP over a long period.When you stay committed to your financial plan you are sure to have a pleasant and profitable investment experience.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.