The overall inflows in mutual funds through the systematic investment plan (SIP) route has stayed steady at over ₹8,000 crore since December 2018. Data from the Association of Mutual Funds in India (Amfi) put inflows from SIPs at ₹8,300 crore in July 2019 and the industry added ₹9.54 lakh SIP accounts on an average each month during the financial year 2019-20. The steadiness of the SIP inflows has been attributed to the maturity of the investors who have not allowed the economic slowdown and the resultant equity market fall to divert them from their chosen path of investments.
However, is continuing your SIPs always good? Just as SIPs help check behavioural responses such as allowing recent events to dictate investment decisions, they can also perpetuate behaviours that may be harmful to your financial security, such as staying with an SIP beyond the exit date. Here are some situations when you should stop your SIP or at least switch it to another fund or strategy.
When financial goals come closer
Stop SIPs in equity funds as your goals come closer. Your investments, including SIPs, are linked to your financial goals. An SIP into equity funds allows accumulating the required sum of money for the goal over the time available. However, as the goals come closer, it is important to move the funds to investments that give steady returns and have a lower chance of losing value. “Lifecycle-based decision to switch SIPs from one category of funds to another is something that we suggest so that the portfolio is aligned to the individual’s current situation," said Suresh Sadagopan, founder, Ladder7 Financial Advisories.
SIPs that were used to accumulate the corpus should be discontinued at the right stage even if you are tempted to continue because you believe there are opportunities to accumulate more units in a falling market and seeing greater gains when markets turn around. But this can be risky because you may be struck in the investment if markets were to decline leaving you unable to fund your goals.
When more investment can skew allocation
Stop, reduce or switch SIPs in a rising market if it tilts the asset allocation of the portfolio too much towards a risky asset like equity.
In a market that is continuously going up, such as the 2012-2017 period, investors are, typically, enthusiastic about continuing SIPs and even increasing them. The increasing valuation of equities will mean that the asset allocation may soon move away from what is suitable to the investor’s risk preferences. If the portfolio is not rebalanced, then a larger portion will be at risk of seeing falling values when the markets decline.
When the asset allocation is going out of sync with your goals, then there are many ways in which you can correct the imbalance. Reducing or stopping additional investments into the riskier asset class, whether through SIPs or a lump sum, is one way to do it. Increasing allocation to other asset classes by moving incremental funds to them is another way. “While we generally don’t ask investors to stop their SIPs, if rebalancing of the portfolio is required, we suggest that they switch some of their SIPs from let us say equity funds to debt funds," said Sadagopan. “We make sure that their level of periodic investment is not reduced. Switching investments from Indian equity funds to international funds is another step we may take if the portfolio allocation demands international diversification," he added.
Srikanth Meenakshi, co-founder and former chief operating officer of FundsIndia.com, prefers the route of selling already accumulated units and reallocating them to the under-performing asset class to rebalance rather than temporarily stopping an SIP. “The decision to stop an SIP temporarily till the preferred asset allocation is restored is too complicated for a retail investor," he said. Stopping an equity SIP when the markets are going up is difficult, but it may do your portfolio good. In a rising market you are buying units at higher cost and this pushes up your average cost. The returns that your investments will earn will be lower.
Keep the focus on asset allocation and let it dictate when you stop investing into equities. Staying with the asset allocation helps prevent market movements dictating portfolio choices.
When the fund is performing poorly
Stop SIPs when the fund in which you have invested shows persistent under-performance compared to its benchmark and peers.
SIPs make it operationally simpler for you to stay with your investments but it may also lead to carelessness in evaluating the performance of their funds. You may end up ignoring the poor performance of your funds for longer periods and this will affect your portfolio’s returns.
Periodic monitoring of the portfolio will help you identify if the funds in which you are investing through SIPs are under-performing. If the under-performance continues for more than three to four quarters, then you should take steps to stop the SIP. “If a fund no longer deserves a place in your portfolio on account of its poor performance, then you should stop an SIP into it. But remember to stop and start. You should switch the SIP into other better performing schemes of a similar type so that your investment plan is not interrupted," said Meenakshi.
When the fund’s profile changes
Stop the SIP if the fund no longer fits your need for risk and return from the investment.
If a fund moves from, say, a multi-cap to a large-cap strategy, it may no longer fit your risk and return profile. A change in the fund management, such as change in fund manager or a merger of a scheme with another or a takeover of the fund house itself may mean a change in the style and strategy of the fund and may warrant stopping of the SIP.
Again, it is important for you to switch the SIP into another suitable scheme.
When your financial situation changes
Stop the SIP if your income has reduced or unavoidable expenses, such as health-related expenses, have gone up, leaving very little surplus to invest. “If the situation on the ground has materially changed for an investor, say a person is moving into an entrepreneurial journey, we may not have visibility on the cash flows and we may suggest suspending the SIP for some time," said Sadagopan.
Persisting with the investment may mean that you are pushed into debt to meet your regular expenses, which will do more harm than good. Take the call to pause the SIP for sometime till your financial situation improves and you are able to start investing again without any pressure on your expenses.
SIP is a facility that helps you do better with your investments in terms of staying with an investment plan without getting distracted by current market sentiments. But like every facility, you should evaluate it periodically and take a call on how to use it so that it can be adjusted to reflect your current situation and work in your favour.