Investments are a 50-50 game, the same investment which may prove to be the genie’s magic lamp can also behave like Pandora’s box. Experts say that in the long run, risks and losses get averaged out while you invest through SIP (Systematic Investment Plan) but these are no God-gifts. SIPs can also make some losses. Although that is totally subject to the market, there are certain risks involved. Now what? Should you stop or withdraw a loss-making SIP or keep that SIP going? We will see to it;
SIPs AND RISKS AND LOSSES INVOLVED
If you were amongst the investors who flooded their portfolio with small and mid-cap funds seeing the market up of 2017 and then faced a sudden fall down in the coming years having doubts about making that investment or people telling you to withdraw that SIP? Don’t do it. Although SIPs have their own set of risks involved, they are an excellent way of diversifying your investment portfolio and spreading out the cost of investment across it. In case of market lows, your overall average cost may fall down but keep that SIP going. It has its own advantage to it- you can buy funds at a lower cost. SIPs are fundamentally meant to lower down the average cost which is done by buying funds at a lower cost which happens in a bear market only. Secondly, it spares you from regularly timing the market which you have to do while making a lump sum investment.
WHEN TO WITHDRAW OR SWITCH THE INVESTMENT?
This is the most frequently asked question by investors- should I withdraw or keep it going? The answer to this question is fund performance. Track the performance of the fund you have invested in. If the fund is on a low performance for less than a year, that might be the market fluctuation affecting it but if the performance is unsatisfactory for above 18 months, consider looking for a better fund.
But this is not the only parameter while mapping the performance of a fund, 10-year or 5-year performance also matters. So be diligent while you make the decision regarding keeping it going or redeeming. You may consider consulting an expert in such a case.
ASSET ALLOCATION AND SIP
This is a very important aspect of the SIP investment. Keeping all your funds limited to small or mid-cap funds only because of the past year returns is not a very good call. Allocate your assets in a diversified manner. It may be a mix of long-term, mid-term and short-term funds. This choice is different for all as everyone has a different set of risk appetite, financial goals, etc.
Limiting your investments to only one type of fund is also not a very good idea. Take care of your risk appetite while you make investments because a lot of people tend to sell-off all their funds during a loss. This is not the right thing to do.
SIP AND LONG-TERM INVESTMENT
SIPs and long-term investment are a marriage made in heaven. This is the best combination of SIPs which creates enormous wealth depending upon the investment made. The longer you stay invested in that SIP, the better are your returns. We think SIPs with a minimum investment of 5 years are the best ones. Also, it takes at least 5 years to average out the losses and market risks. Plus, the power of compounding acting in the back needs its own good time to show great results. As they say “Good things take time”.
A market correction phase does not mean you have to redeem or sell out those funds, take it as an opportunity to buy more funds at a lower price. And yes, not to forget, panicking is not a solution. Relax and wait for the markets to rise and pay-off well.
Also, if you are someone who wishes to opt for a lump sum investment then do it now and choose an STP plan. This is the right time to do, waiting for it for fall a little more or rise a bit is not advisable as the volatility is unpredictable.
There is nothing like a loss-making SIP, it is just the market situation which is bound to improve sooner or later. Hence, keep that SIP going!
Start Investing, Stay Invested!