Is mutual fund SIP an all-weather investment tool?

SIPs are instrumental when it comes to building a corpus over a period. Many people invest through SIPs and increase the amount regularly. Due to their long-term nature, SIPs are most likely to go through different stock market phases multiple times.

In investing, a lot is discussed on how our behaviour as investors is more important than our investments. When the stock markets are rising, everyone feels much in control of their investments as they look at the growth rate. However, the key is to have similar discipline in uncertain times too.

While looking for the right MFs to invest in, we should look at how these funds have fared during good and bad times. How we behave during such times is equally important.

As we all are aware the stock market was down by 38% on 23 March 2020 from its peak in January 2020 and remained volatile for some time. A lot of investors invested during those uncertain times and rightly so to take advantage of the falling market. Most of these investments were in the form of lump sum and worked well for them. However, some investors considered pausing or stopping their SIPs then and recently too when the stock market was volatile between January 2022 to June 2022. Such thoughts are natural. Seeing a rapid decline in portfolio returns can push investors to take such a decision. However, this may not be the best thing to do.

Let us look at three investment scenarios, in case we had a monthly SIP of 5,000 in a Nifty Index Fund from January 2019 and how these investments would have performed (see graph). Here, the index fund is just considered as an example, you can build the mutual fund portfolio with the help of other equity diversified funds along with index funds.

During volatile times, many investors think that the market could fall further and stop SIPs. However, there is a cost to such reaction. It impacts the overall returns (see table). The growth rate of uninterrupted SIPs continues to deliver better results compared to the ones that are paused and restarted. Besides, it also helps to be on track from a goal-based investment perspective.

SIP is a powerful and reliable tool when it comes to investing through mutual funds, particularly for those who are building their portfolio to meet their goals, step by step. There are many merits of staying the course and remaining firm throughout the time when investing through SIPs. As we see, in all three scenarios, it is not how the stock market or the Index Fund behaved that resulted in different returns on investment, it is how we reacted and managed our investment that made the difference.