Should You Stop Your Mutual Fund SIP?
Evaluating Investment Horizons and Market Trends
Deciding whether to stop your mutual fund Systematic Investment Plan (SIP) hinges on the initial investment period and objectives you set. If your goal was to accumulate money for your child’s education 15 years down the line, there is no reason to halt your SIP after merely 20 intervals when the original investment horizon was planned for 180 months.
The Importance of Staying Invested
Continuing your SIP allows you to benefit from market corrections. By averaging, you acquire more units at lower prices. SIPs are designed to help investors navigate market volatility, and stopping them prematurely can hinder your long-term financial goals.
Rebalancing and Its Benefits
Indices such as the Nifty or Sensex are subject to rebalancing by exchanges, which automatically remove non-performing stocks and include wealth builders. This realignment ensures that the constituents of the index evolve, adapting to market conditions and growth opportunities. Consequently, indices generally show an upward trend over the long term.
Here is the data on Sensex for reference. You can see that the stocks which are currently part of the Sensex only 6 of those were part of index in 1990. Over the period many stock came and go. Even for last 4 years period we can see 6 stocks were removed for non-performance or not meeting index rebalancing criteria.
Notes:
· Present indicates the company was part of the Sensex in that year.
· Dropped indicates the company was part of the Sensex in the previous year but was removed in the year shown or later.
The dash ‘-‘
indicates the company was not part of the Sensex in that year.
·
This table is constructed from historical data available, but specific company inclusion in each year might vary slightly due to periodic reviews and modifications by the BSE. The remarkable growth of the Sensex over the decades stands as a testament to the resilience and strength of the Indian stock market. In 1990, the Sensex hovered around 1,000 points, a humble figure compared to its towering presence today. Fast forward to February 2025, and the Sensex has
surged to approximately 74,000 points, reflecting a staggering 74-fold increase. This exponential growth can be further understood by considering the
Compound Annual Growth Rate (CAGR). Over a long-term period, such as from 1979 to 2019, the Sensex has shown a robust CAGR of approximately 16.1%, excluding dividends.
Why Topping Up Your SIP Makes Sense
When the market corrects, consider topping up your SIP. This strategy allows you to capitalize on lower unit prices, enhancing your portfolio’s value over time. The concept of rebalancing facilitates sustained growth by continuously optimizing the index composition.
In summary, if your investment horizon extends over several years or decades, maintaining and even increasing your SIP during market corrections can be highly beneficial. The inherent resilience and adaptability of market indices make them a reliable vehicle for long-term wealth accumulation.