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Mutual Funds: With falling markets, should you stop your mutual fund SIP ?


With falling markets, one's knee jerk reaction would be to stop mutual fund SIP to avoid losses. People make a beeline to invest in mutual funds when market is going higher and shy away from falling market. Thus, one ends up investing when mutual fund NAV is at the highest and by stopping of mutual fund SIP you lose a chance to average out on your buying price. Benefit of mutual fund SIP is that you get more mutual fund units when markets are lower and less units when markets are higher. By stopping SIP you lose on cost averaging benefit of SIP and thus, your potential to get better returns are lowered.

Secondly, due to termination of SIP your discipline to save a certain amount monthly gets affected. You might end up splurging the money which you would have normally invested in SIP or make some bad investment decisions.

Let us say, you stop your mutual fund SIP and you wait for the market to improve. With this strategy you may end up investing again at higher levels and also miss out on the opportunity to buy mutual fund units at cheaper levels.

One may have an idea to save the SIP money and invest as lump-some at a particular point. It is difficult to gauge both peak and bottom of the market. Market may be cheap at that point but there is no guarantee that it will not fall further. Sentiments may come into the play and one may avoid investing in the fear that market may fall further. Till you make your decision and get enough courage to deploy the entire amount, the market may rise to higher levels.

I started investing in Jan 2007 when BSE Sensex was around 14000 levels. In Jan 2008, the market peaked to reach around 21000 levels and then there was 2008 crisis after which market fell to around 15200 levels in April 2008 and 13000 levels in October 2008. I got afraid and stopped all my mutual fund SIP, only to invest money in ELSS tax saving mutual fund to meet my tax commitments when market was around 8500 in Dec 2008.

In Dec 2009, market was at 17400 levels and my ELSS investment had doubled. I missed opportunity to average out on my non-tax saving investment which led to my returns being substantially reduced. If I had not panicked and continued my SIP then my SIP returns would have been far better.

If you would have been in my place, then at which levels would you have made a lump-some investment?

15200, 13500, 8500 or 14600?

Would you have had the courage to invest when market corrected by more than 50%?

If you have a long term perspective (more than 4 years), then do not worry, just continue with your mutual fund SIP. When you feel market is near its peak or highly overvalued then redeem 20-30% percent of your portfolio. Invest this amount when you feel that there is a good opportunity. Never forget the below quote by Mr. Warren Buffet.

Warren Buffet an American business magnate and investor, once quoted “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"

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