SIPs or a Systematic Investment Plan is a great tool to build money in the long run with a minimum time period of 5-10 years. It offers multiple advantages like a low minimum capital requirement, averaging benefit, formation of investing habits, etc. However, the most adequate time to stop your SIPs is when your financial goals are met or when you feel to change the objective of your investments.
A SIP or a Systematic Investment Plan is a method of investing a specified sum of money at frequent intervals into an asset. A sip method of investing can be practiced in equity (mutual funds), debt (bonds), or other alternative investment options like gold or REITs (Real Estate Investment Trusts).
Investing through a SIP offers multiple advantages. Some of them are listed here.
Investing in direct equity shares requires a substantial amount of capital. Some good quality shares are over Rs 10,000 in the Indian share market. This becomes a problem if you want to gain exposure to these companies. Well by investing in Mutual Funds that own these companies, you can gain exposure to these shares indirectly. Mutual Funds also provide a SIP feature of as low as Rs 100 or Rs 500. So regardless of your income, you can start small with the help of SIPs.
SIPs are an effective way to build an investment discipline. It not only helps you to invest regularly but also establishes a habit of allocating your money into productive assets. With the help of a regular SIP plan, you will be able to ride the ups and downs of the market without panic. New investors often commit mistakes like panic selling or FOMO (fear of missing out) buying. These mistakes are avoided when you follow a sip.
A consistent SIP helps you to achieve your long-term goals without having to time the market. A monthly SIP allows you to take advantage of the highs and lows of every kind of market. This provides an average weighted cost on investment, therefore reducing the risk of lump-sum investing. In a lump-sum investment, you tend to take more risk as there is a risk of buying at the near-term market top. This can cause lower returns for an extended period of time.
Here is a simple overview of a 5-year SIP in a Blue Chip (Large Cap) fund with a sip amount of just Rs 1,000 per month.
Even after the 2019 stock market crash, you could have generated an absolute return of 88.79%. This shows that SIPs are an excellent tool to get consistent compounded returns and it also shields you from short-term market volatility.
Now that you have looked at some of the key advantages and features of a systematic investment plan. It is important to know when to stop them.
Before knowing when to halt or exit a mutual fund, let’s first know when you should not stop a SIP.
This is the absolute worst time to stop your SIP as technically you are giving up free money. Whenever the markets are down, you get good companies at a significant discount. Instead of stopping your SIPs, you should double down on them to get better returns when the market returns to normal.
Now coming back to the question, “When to stop a SIP?”
Ideally, there are 2 scenarios when you can consider stopping your SIPs.
Most of your investments might be mapped to a specific purpose. It could be anything, from planning for a vacation, a house, to your retirement, etc. Once these goals are fulfilled, you can exit your SIPs and use your returns to fulfill your goals. Moreover, if you are investing in a SIP, you should have a minimum time horizon of 5-10 years so that you get the benefit of long-term compounding and rupee cost averaging.
The second reason when you should stop your SIPs is when you feel your investment objective has changed. For example, you might have a higher-risk appetite when you are young, but as you grow older your risk tolerance reduces. Hence, you can shift some of your money from riskier instruments like equity into more protected instruments like debt. To make this change you can stop your SIPs and re-balance your portfolio according to your requirements.
Another reason for you to stop your SIPs is when the fund is not performing well when compared to its peers. If you feel your selected fund is unable to beat the market or the fund manager has changed. In that case, you can consider shifting your funds to a more competent fund in your respective category.