SIP myths debunked: When investors should step up, pause, or stop them

Systematic investment plans (SIPs) have witnessed expenential growth among retail investors, according to a recent study by Zerodha Fund House. They account for 20 per cent of the industry’s total assets under management (AUM). The total number of SIP accounts rose from 52.8 million in March 2022 to 93.4 million by July 2024. The amount contributed by SIPs rose from Rs 12,300 crore to Rs 23,300 crore over the same period.

An SIP allows investors (particularly the salaried class) to match their cash flows with their investments. It removes timing-related dilemmas and provides the benefit of rupee-cost averaging.

 

Step-up SIP 
 

 

Investors can make their SIPs more effective by adopting the step-up variant, which entails investors hiking their SIP contributions at regular intervals. The Zerodha study discusses a case where an investor puts in Rs 1,000 per month in the Nifty LargeMidcap 250 Total Return Index (TRI) from April 2005 till March 2024. With a normal SIP, the investor ends up with a corpus of Rs 12.6 lakh. With a 5 per cent annual step-up, she accumulates Rs 17 lakh. A 15 per cent step-up boosts the corpus to Rs 35 lakh while a 25 per cent hike sends it skyrocketing to Rs 84.5 lakh.

 

No time like now for step up
 

There is no right or wrong time to step-up SIPs. “It should be done in tandem with the increase in income. By going for the step-up option, you will reach your goals faster,” says Nehal Mota, co-founder and chief executive officer (CEO), Finnovate.
 

Market conditions should not drive this decision, since SIPs are about letting time work in one’s favour by staying invested for the long term and letting rupee-cost averaging work its magic. “You may step-up anytime provided you do so in keeping with your risk appetite-based asset allocation,” says Abhishek Kumar, a Sebi-registered investment advisor (RIA) and founder, SahajMoney.
 

Experts also suggest regular portfolio reviews. “Review your portfolio in April or May every year, just before you get the salary increment,” says Manish Mehta, head of sales and marketing, Kotak Mutual Fund.
 

Kumar cautions that investors should avoid over-stepping, as over-committing to SIPs can strain finances.

 

When pausing is okay
 

Sometimes, events like job loss or health and other emergencies affect one’s ability to meet monthly commitments. One may pause SIPs in such a scenario.
 

Pausing is also okay when valuation indicators flash red. “If you feel the market is overvalued, you may pause equity SIPs and restart when valuations have eased,” says Mota.
 

One may also pause to meet one’s asset allocation requirement. “If you have achieved your ideal allocation to equities, pause your equity SIPs and redirect fresh money into debt instruments,” says Kumar.
 

Don’t pause SIPs during a market downturn as you would miss out on the opportunity to buy fund units at low prices. “It can impact financial discipline and lead to missed opportunities,” says Kumar.

 

When to stop an SIP
 

An SIP may be stopped and the corpus redeemed once a financial goal has been achieved. Sometimes, fund-related developments necessitate stoppage. “The fund manager may have changed and the new manager may not meet your criteria. The fund’s performance may not be up to the mark. The fund’s mandate may have changed and may not suit your risk appetite and time horizon,” says Mota.

Myths about SIPs debunked

Myth: SIPs guarantee good returns 

Reality: SIPs are subject to market risks. They benefit from rupee cost averaging and compounding but do not eliminate market volatility

Myth: SIPs are for equity investments only

Reality: While they are mostly used with equity mutual funds, they can also be used with debt, hybrid, and other types of funds, depending on the investor’s risk profile and objectives

Myth: SIPs need a long-term commitment. 

Reality: SIPs offer flexibility, allowing investors to start, pause, or stop their investments at any time. There’s no strict requirement of a long-term commitment, although staying invested for longer may boost returns