Why investors should continue investing in SIPs even in a bear market

The popularity of Systematic Investment Plan (SIPs) has gone up in the last couple of years. Investment Advisors and Mutual Fund Managers recommend investment through SIP in diversified equity funds. But SIPs make sense only if invested for a long period of time. Returns on a short-term SIP are insignificant or irregular. As the investment period increases, the gap between invested amount and market value of investment widened substantially. Time works like a lever in the market. So a large amount of return can be earned by investing a small amount of money consistently for a long period of time.

The recent fall in the equity markets has seen some investors getting negative returns on the SIPs.  This raises the question as to whether SIP should be discontinued during bear phases of the markets.

The philosophy behind starting SIP with an equity scheme is to go on investment despite any market conditions. Investors should not stop it in downturns but should keep investing through sip for a long period of time. Otherwise, They will lose in the long run on the chance of making money. Here’s why:

1. Average cost of Rupee:

This is a beneficial approach for most of the investors. They can buy more units when prices are low and less when prices are high. Ideally, most investors want to buy stock when the price is low and they sell them when prices are high. But the market condition is full of risk. The average cost of rupee can help to reduce the average cost of a share for a long period of time. And it will increase your profit when the market starts rising. However, this method doesn't guarantee you a profit or eliminate risk. If you sell a lower share in the market, then it will not save you from the loss. Before adopting this strategy, you should consider your ability to continue investing in a lower price level period.

2. Power of compounding:

Compounding means that the money you invested can be reinvested to make more money than your initial investment. The money you made goes back to work to make more money than ever before.

Investors shouldn’t worry about stopping SIPs when the market is declining.  In fact, that is the period when an investor can deposit more units at an affordable cost and then can benefit from the final steps in the markets. To meet long-term goals, SIP is done by investors and should be done for at least 5-10 years. They should not be worried about near-term instability or small negative returns in near term. The improvement is the best time to deposit the maximum number of units for the future. Indeed, investors can use this opportunity to raise SIP funds using the top-up facility provided by the Fund House.