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My SIP is underperforming for last 3 months. Should I stop SIP?

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“Patience is your biggest virtue in investing”

SIP investments into equity mutual funds should always be done with a long-term view. A period of 3 months is too small to even judge the performance of a fund, let alone decide to stop SIP or redeem it. In fact, ups and down (volatility) in fund performance leads to better SIP returns in the long term. The best way to get rich with SIP is to identify a good set of diversified equity mutual funds, start SIP and watch them from a corner. If you are not sure about fund picking, then take help of a financial advisor (like Upwardly.in).

How SIP benefits from volatile markets?

Volatile markets act as a boon to SIP investments. Let us understand how this works. Through SIP, you invest a fixed amount monthly in a mutual fund and you get some mutual fund units. When the markets are down, mutual fund NAV goes down and you get more mutual fund units. Thus, the average cost of units in your investment goes down. When the market eventually goes up in the long term, all units grow. The units you accumulated in bear (low) markets, grow even more. Thus, stock market volatility leads to higher SIP returns.

When is the time to stop SIP?

While the definition of “underperformance” differs from investor to investors, we will look at a thumb rule. If your mutual fund SIP has been underperforming for less than a year, there is no reason to change. Even the best mutual fund experience fluctuations and underperform their peers and benchmark in the short term. However, if the fund continues to underperform for more than 18 months or so, then it is time to stop SIP and move on to better funds. Or better still, consult a good financial advisor who can advise fund changes when it is necessary.

A key point to note is that a fund’s performance should be compared to a suitable benchmark or to similar funds. i.e. – SBI Bluechip Fund, a large cap fund should be compared to Nifty 50 or Nifty 100 indices. Meanwhile, SBI Magnum Multicap fund should be compared to NSE 500 index. e.g. – 10% annualized returns maybe underperformance for Multicap funds while good returns for Large cap funds.

Do not stop SIP unless necessary

SIP is powerful since it helps the investor stay disciplined while leveling out market fluctuations. Investing your regular savings in SIP will fetch you a big corpus for long term financial needs. However, stopping SIP midway due to return fluctuations defeats the objective of SIP while lowering the returns. To get the best returns, let SIP do its job while you wait patiently.

You can read this article in Hindi here.

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