Mutual Funds - Continue your SIPs if they are not a strain on cash flow, say advisers

In what shows that economic distress and market turbulence are weighing on investors’ confidence, the systematic investment plan (SIP) stoppage ratio jumped to a fresh high in March 2020. The ratio measures SIP stoppages as a percentage of fresh SIPs registered. It hit a level of 71% in March, meaning that for every 10 new SIPs being registered, seven were being closed. The benchmark indices collapsed by around 23% in that month on the back of rising cases of covid-19 and the national lockdown that followed. Should this worry you?

In rupee terms, SIPs have held above the 8,000 crore mark in terms of inflows since December 2018. In March 2020, they reached a 12-month high at 8,641 crore. At the same time, the SIP stoppage ratio moved up to 71%, above its previous high of 66% in September 2020 to also hit a 12-month peak.

However, a look at the two components of this ratio reveals that the jump in the stoppage ratio was largely due to fewer fresh SIPs being registered rather than existing SIPs being discontinued. The prospect of job losses or hits to income for self-employed people is likely to have triggered this drop in fresh SIPs. To a lesser extent, market volatility and losses on existing equity investments due to the market fall would have also put off investors. Financial advisers have been largely optimistic about investor behaviour, suggesting that the ratio may not be indicative of a strong trend and have instead pointed to do-it-yourself (DIY) investors staying away from markets due to fear. “I have not seen any SIP stoppages among my clients. There have also not been many layoffs yet. Some of the closures might stem from direct investors coming through online platforms," said Prakash Praharaj, founder of Max Secure Financial Planners.

Is there a slowdown in SIPs?

Advisers have also asked people to continue with their existing SIPs, with the exception of two categories. First, those who need money for their monthly living expenses. This may be due to a drop in income, job loss or a pay cut. Second, those who do not have a big enough emergency corpus. It is, typically, recommended that one should have at least six months of expenses as emergency corpus; given the current situation, may advisers are recommending up to two years of expenses in safe and liquid assets. 

As noted by financial advisers, investors should continue with their SIPs in line with their risk appetite and financial goals provided they have adequate emergency corpus. SIPs take away the need to time the markets. So do not be fazed by the market or economic downturn and stop your SIPs.

Source : Live Mint back