Should You Stop Your SIP When the Market Is Not Performing Well?
- Key Insight from the Study:
- Successful SIP: The Smart Investor’s Choice!
- Data Insights: SIP Returns Based on Initial Performance
- Why Continuing SIPs Is Wise:
- 1. Market Recovery Potential:
- 2. Rupee Cost Averaging:
- 3. Compounding Effect:
- 4. Avoid Emotional Investing:
- Real-World Example:
- Conclusion:
- Frequently Asked Questions
Investors often grapple with the dilemma of whether to stop their SIP (Systematic Investment Plan) during market downturns. It’s natural to feel concerned when returns seem discouraging. However, historical data suggests that staying invested during such periods can be beneficial.
💡 Quick Answer
No. In the BSE Sensex TRI study, SIPs whose first five years returned 8% or less went on to average 18.7% over ten years, while those that started stronger averaged 14.8%. A weak start often precedes a better decade, because falling markets buy more units and compounding needs time.
Key Insight from the Study:
The SIP analysis conducted on BSE Sensex TRI from August 1996 to May 2024 reveals a surprising trend: SIPs that experienced lower returns during the initial five years often yielded better returns over a ten-year horizon.
Successful SIP: The Smart Investor’s Choice!
A successful SIP is more about “Starting Early”, maintaining the discipline of “Investing Regularly”, investing for the “Long Term” to achieve our “Financial Goals” and less about “Which Date”, “Which Frequency”, “At what stage of the Market Cycle” etc.
Data Insights: SIP Returns Based on Initial Performance
| First 5-Year SIP Return Range | Average 10-Year Return (XIRR %) |
|---|---|
| Less than or equal to 8% | 18.7% |
| More than 8% | 14.8% |
Why Continuing SIPs Is Wise:
1. Market Recovery Potential:
Equity markets are inherently volatile. A slow start in SIP returns often leads to better performance due to the market’s recovery over time.
2. Rupee Cost Averaging:
When the market is down, your SIP buys more units at lower prices, reducing the average cost per unit and boosting long-term returns. This is the same reason the SIP frequency you choose matters so little.
3. Compounding Effect:
The longer your money stays invested, the more time it has to benefit from compounding. Stopping SIPs disrupts this growth cycle.
4. Avoid Emotional Investing:
Making investment decisions based on market sentiment can be counterproductive. A disciplined approach works better.
Real-World Example:
Consider two investors:
- Investor A: Stops SIP after five years due to low returns (~8%).
- Investor B: Continues SIP despite similar returns.
By the 10th year, Investor B sees a significant performance boost, with returns averaging 18.7%, far surpassing Investor A’s returns.
Conclusion:
Stay the Course Stopping an SIP during market downturns could mean missing out on future gains. Historical data supports a disciplined, long-term SIP strategy, emphasizing that market volatility is temporary, but compounding returns can be lasting. If anything, the case for staying invested strengthens the longer your SIP time horizon.
Stay invested, stay disciplined, and trust the process.
Key Takeaways
- The BSE Sensex TRI study found SIPs with first five-year returns of 8% or less averaged 18.7% over ten years, against 14.8% for those that started stronger.
- Equity markets are inherently volatile, and a slow start in SIP returns often leads to better performance as the market recovers over time.
- When the market is down your SIP buys more units at lower prices, reducing the average cost per unit.
- Stopping a SIP disrupts compounding, which needs time in the market to work.
- Making investment decisions on market sentiment is counterproductive; a disciplined approach works better.
Frequently Asked Questions
Should you stop your SIP when the market is down?
No. Historical data suggests staying invested during downturns is beneficial. In the BSE Sensex TRI study, SIPs that experienced lower returns during the initial five years often yielded better returns over a ten-year horizon.
What happens if you continue a SIP through a weak market?
SIPs whose first five-year return was 8% or less went on to average 18.7% XIRR over ten years, while those whose first five years returned more than 8% averaged 14.8%. Investor B, who continued, saw a significant performance boost by the tenth year.
Why do falling markets help a SIP?
When the market is down, your SIP buys more units at lower prices, which reduces the average cost per unit and boosts long-term returns. This is rupee cost averaging.
Does stopping a SIP affect compounding?
Yes. The longer your money stays invested, the more time it has to benefit from compounding, and stopping SIPs disrupts this growth cycle.
What period did the SIP downturn study cover?
The analysis was conducted on the BSE Sensex TRI from August 1996 to May 2024, comparing the average ten-year XIRR of SIPs grouped by whether their first five-year return was at or below 8%, or above it.
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