Uncertain equity market conditions test investors’ patience. In addition, Foreign Portfolio Investors (FPIs) seem worried and have either been dumping Indian equities or turning cautious. Though the case is similar for domestic mutual funds, they, however, have been binging and buying, recognising the value-buying opportunities in the sharply corrected market.

As far as investors are concerned, they have remained somewhat upbeat, but then again few have also begun to lose patience if we were to go by the Systematic Investment Plan (SIP) registration data for March 2020.    

As of March 2020, the ratio of monthly SIP closures to new registration was 57:100, i.e. for every 100 new SIP registrations, 57 SIP mandates were discontinued. And as the markets came under the weather in March, this ratio shot up to 70:100. In effect, 2 SIPs were discontinued for every 3 new registrations.

Table: Increasing registration and cancellations of SIPs…

Month Total No. of outstanding SIP Accounts No. of New SIPs registered No. of SIPs discontinued Monthly SIP Contribution (Rs crore)
Mar-20 312.0 8.5 6.0 8,641
Feb-20 309.5 11.4 5.7 8,513
Jan-20 303.9 12.1 6.0 8,532
Dec-19 297.7 9.6 5.9 8,518
Nov-19 294.0 10.9 5.6 8,273
Oct-19 288.7 10.0 5.3 8,246
Sep-19 284.0 8.5 5.6 8,263
Aug-19 281.1 8.8 5.8 8,231
Jul-19 278.1 10.2 5.6 8,324
Jun-19 273.6 9.3 5.4 8,122
May-19 269.7 9.7 5.9 8,183
Apr-19 265.9 9.0 5.4 8,238

Note data for April 2020 was not available at the time of writing this piece
(Source: AMFI)

If this trend continues in the future, it will be a cause of concern not only for the mutual fund industry and advisors, but for the investors as well because discontinuing SIP, particularly in worthy mutual fund schemes, will be akin to applying brakes on the journey of wealth creation, hamper overall financial planning, and preclude accomplishing the envisioned financial goals.

Why investors are closing their SIPs at this juncture?

Besides the heightened volatility – almost like a rollercoaster — factors such as uncertainty about income and a possible rise in unemployment have affected the new registrations and cancellations. There is risk-aversion that has set in and the general perception is “Cash Is King”.

Usually, having at least a 3-5 year investment time horizon and continuing SIPs is necessary when investing in equity-oriented mutual funds. But as  SIPs in equity scheme started 3-4 years ago are generating paltry returns now due to the recent market slump, there are some investors who have begun to stop or discontinue SIPs. Either they are the first time investors who lack experience of dealing with equity markets, or have been unable to tolerate the rollercoaster ride of the Indian equity market of late (scared of volatility).

Here, the role of experienced financial advisors becomes crucial.

As a financial advisor or a financial guardian, you should be able to explain to clients/investors the reasons to continue SIPs and ask them the right questions to be able to address their worries.

For example, if an investor approaches you, the kind of investor who has done everything right on her/his part —followed asset allocation, selected the best and appropriate mutual fund scheme/s, and SIP-ped into them yet failed to generate any meaningful return, as a financial advisor or financial guardian explain to them how unintelligent is it to step out of markets by discontinuing SIPs.

Many investors lose their path midway. And it happens as the market conditions turn bearish and turbulent, plus insecurity pertaining to income as well as their job begins to set in and affects their decision-making. When they run short of insight and the money-tap runs thin, they tend to look short-term and compromise on their long-term financial wellbeing. But in the bargain, they do more harm than good to themselves.

Financial advisors must share past experiences…

Investors should know how those who opted out of markets during the fall of 2008 and early 2009, missed the massive upturn that happened after March 2009 onwards. During the early part of recovery in March 2009, many investors thought those were just short-term impulses after a bear phase, but when UPA-II came to power, the Indian equity market rallied briskly not giving a chance to those waited on the side-line to enter the market. Those who did not discontinue their SIPs between February 2008 and March 2009, gained substantially.

In almost a déjà vu moment, the results of Lok Sabha elections in 2014 were unexpected and those who had discontinued their SIPs during 2012 and 2013 repented latter.

Sharing historical evidence and experiences can boost investors’ confidence. And then, to sum up, you can give them pointers on why they shouldn’t discontinue SIPs.

Discontinuing the SIP now means:

  • Losing on to the opportunity to accumulate more units
  • Missing the future upside potential 
  • Deviating from the original objective of doing SIPs
  • And perhaps not utilizing your surplus in a right way

Unless one’s income is affected to a level where one has to choose between meeting household expenses and continuing SIPs, discontinuing your monthly investment commitments doesn’t seem to be an intelligent choice. There as well, one should first look to reducing expenses by engaging in a prudent budgeting exercise.

The present lockdown conditions have taught many of us a lesson on how much money we actually require to live a moderate life without compromising on the essentials. Before SIPs are cancelled, investors must ensure that there’s no further room to cut expenses.

Investors with high discretionary income may not have a problem of budgeting; they might simply want to stay away from uncertainty. If somebody does not want to increase the SIP contributions despite weaker markets, one should at least not discontinue or stop SIPs as it reduces the potential to generate returns in the future and hinders achieving those envisioned financial goals.

SIPs are meant for all market conditions and work best during bear market phases. Volatility is the very nature of the equity market; it is how we use it to our advantage, perceive the situation sensibly, and devise an efficient strategy that decides our investment success.

Recommend your clients/investors not to stop SIPs in worthy mutual funds as far as possible.

by PersonalFN Content & Research Team

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