SIP TIPS: WHEN SHOULD INVESTORS STOP OR REDEEM SYSTEMATIC INVESTMENT PLANS?

Systematic Investment Plans (SIP) are quite popular among retail investors for a variety of reasons – right from enjoying the power of compounding to rupee cost averaging to disciplined investing, and the list goes on. Having said that as SIPs invest in mutual funds, they are subject to market risks. As a result, there could be times when an SIP makes losses on investments as well. So, what should an investor do in such circumstances? Should he pause or stop his investments? Or should he continue to invest in SIP. Read on to know when you should stop or redeem your SIP investments.

Asset allocation

Asset allocation strategy is an important aspect of mutual fund investment, which includes SIP as well. The returns on equity funds are function of stock markets. This means that if the market is not performing too well, then your equity funds are also likely to follow the same path and provide unsatisfactory returns. It might not be the best idea to allocate a majority of your portfolio is small-cap or mid-cap funds just because their returns were exceptional the last year. Experts advise investors to allocate their assets in a way that helps to diversify their portfolio. An ideal strategy would be mixing your short-term funds, mid-term funds and long-term funds. However, one must note that this varies from person to person and may not hold applicable for all investors. You must also ensure that you invest in mutual funds after carefully analysing your risk profile and your investment options must have a similar risk appetite. If you are a risk-averse investor, you might prefer allocating a majority of your portfolio to equity mutual funds, especially mid-cap and small-cap funds. However, if you are a conservative investor, you might prefer investing a majority of your assets in fixed-income instruments, gilt funds, short-term debt funds, etc.

When should you withdraw your SIP investments?

There is no right answer to this question as it differs from situation to situation, and investor to investor. However, one way is to check the performance of your funds. You can do this by tracking the performance of your fund at different market cycles over the years. This will give you a clearer picture of the returns on your investments and whether the returns are consistent or not. You can also compare the performance of your fund against its underlying benchmark or other similar funds having similar composition. 

As a good thumb rule of investing, if a fund is consistently portraying poor performance for less than a year, then it might be too early to make a decision as the low returns could be a result of market fluctuations. However, if the fund is exhibiting poor returns for consecutive 18 months, then it might be the time to switch to a better performing fund.

All in all, you must have the patience and perservance when investing in mutual funds. If your funds have shown poor returns or there is negative sentiment in the markets, rather than taking a knee-jerk reaction, take a step back and analyse your investment decisions. Investments that are not taken hastily are usually the ones that are not regretted by investors later. Happy investing!