Systematic Investment Plans (SIPs) are one of the most popular investment options in India today- recent data shows that more than 23 lakh new SIP’s were started in December ’22 alone! Undoubtedly, SIP’s are a great way to create wealth over a long-term period, as you can start with a small amount of money and gradually increase it over time. SIPs come with a number of benefits, including the flexibility to choose the amount you want to invest and the frequency of your investments. Furthermore, SIPs provide a disciplined way to invest and also help to reduce the risk of market fluctuations.
However, although SIP’s are usually started for long term goals, we more often than not find investors end up stopping them well before their goal target year – and this usually happens when markets turn volatile. With the recent Hindenburg report sending Adani Group stocks spiralling and affecting the overall sentiment in the stock markets, your SIP’s may have slipped into the red and you may be tempted to stop them prematurely too. Here are a few reasons why you should not do so!
First and foremost, you may miss out on the power of compounding. SIPs are a long-term investment, meaning that your returns will be compounded over time. This means that your returns will grow exponentially, especially if you are investing for the long-term. If you stop your SIPs prematurely, then you will miss out on the power of compounding.
Second, you may miss out on the advantage of rupee cost averaging. SIPs provide you with the opportunity to buy more units when the markets are low, and fewer units when the markets are high. This helps to reduce the overall risk of your investment portfolio, as you will not be investing in a single stock or mutual fund. Therefore, if you stop your SIPs prematurely, you may miss out on this advantage.
Third, you may suffer from the effects of market timing. Market timing is when you try to time the market by predicting when it will rise and fall. However, this is not an exact science and can be quite risky. Therefore, if you stop your SIPs prematurely, you may be exposed to the risk associated with market timing as you may start fence sitting in wait of the “perfect” opportunity to restart them – which may well never come.
Finally, if you stop your SIPs prematurely, then you may miss out on tax benefits in case your SIP’s are running in ELSS Funds. ELSS Funds are eligible for tax deductions under Section 80C of the Income Tax Act. Therefore, if you stop your SIPs prematurely, then you may miss out on this advantage.
Overall, SIPs are a great way to invest and create wealth over a long-term period. They are a flexible and disciplined way to invest and help to reduce the risk of market fluctuations. Therefore, it is important to not stop your SIPs prematurely, as you may miss out on the power of compounding, the advantage of rupee cost averaging, and potential tax savings. Too.