Understanding the SIP pause impulse
SIPs are created to make one wealthy over a period of time by investing a set sum of money at regular intervals, irrespective of the market condition. But during turbulent periods, most investors get nervous and stop their SIPs to avoid incurring more losses. Although this may give short-term psychological comfort, it disturbs the process of compounding and slows down financial objectives.
The strength of rupee cost averaging
One of the biggest advantages of SIPs is rupee cost averaging, i.e., you buy more units at lower periods and less at higher periods. Stopping your SIP during a downturn is, therefore, losing out on buying extra units at lower prices. These lower purchases over the long term will greatly boost your returns the instant the market recovers, so stopping is actually counterproductive.
Compounding does its best with regularity
Wealth creation in a mutual fund depends heavily on compounding power—interest on your original investment as well as on previous gains. Gap between contribution hinders this snowballing effect. A couple of month's delay occasionally can bring down the final corpus, especially if your holding period is long term. Sticking to discipline at times of tumultuous markets means that compounding takes place unbroken in your interest.
Emotional decision can effect your goals
Market fluctuation makes you decision-making anxious, yet quality investing is patience. Stopping SIPs during bad times is an aim to time the market, which even the professional investors cannot accomplish. Continuing with your SIPs means that you are not taking hasty decisions that can reverse years of don't-quit spirit at investing and planning.
When a pause may be deserved
While it is not advised to stop SIPs during periods of market instability, there might be genuine reasons to stop them—such as sudden loss of employment, heavy medical expenditures, or sudden need of money. Even then, stoppage has to be temporary with a plan to restart contributions at the earliest to continue along the path to your goals.
FAQs
Q1. Does stopping SIPs save me from losses?
Not really. The value of your past investments will merely continue fluctuating with the market. A break merely prevents fresh investments from being invested, perhaps robbing you of your source of investing at lower points.
Q2. How do I recover missed SIPs?
You can increase the SIP amount or add lump sums subsequently, but that requires self-discipline and won't make up for lost compounding time.
Q3. Should I reduce SIP amounts instead of suspending them?
If there is financial distress, reduction of the SIP amount for some time is better than suspending it, since the discipline of investing is not lost.
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