Don’t Stop Your SIP: How Market Recovery Impacts Mutual Funds

Considering stopping your SIP? If this is because of a volatile market or any ‘reds’ have been scaring you, fret not, we are here to help you calm your worries. The moving market cycle can become a reason of hesitation for many investors. However, this shouldn’t become a reason for you to stop the SIP. Market fluctuations are bound to happen. Hence, it becomes key to understand how the market cycle moves before you take any rash decisions with respect to your personal investment journey or start looking for ways to stop your SIP.

Understanding the Market Cycle in context of SIPs

The market cycle essentially describes the different phases an economy and its financial markets typically go through. These phases are often characterized by specific trends in economic growth, investor sentiment, and asset prices. While the duration and intensity of each phase can vary, the general cycle includes:

Expansion (Bull Market): This is when the economy is expanding, corporate profits increase, and the stock market tends to rise. SIP investments will normally yield good returns since your investments share in this growth. Rupee cost averaging assists in accumulating some units at possibly lower costs during minor dips in the market.

Peak: This is the peak level of economic growth. Although one cannot predict with certainty, your SIPs will most likely keep growing. Future investments may be at a higher rate, but previous investments at lower levels will still be worth something.

Contraction (Bear Market): The economy tapers or contracts, possibly into declining profits and increasing unemployment, with a dropping stock market as well. Your SIP portfolio value will probably dip. But importantly, you will be purchasing additional units for the same amount of investment because of rupee cost averaging, making way for the future recovery.

Trough: This is the low point of the economic downturn. When the market starts to improve, the units purchased at lower prices during the slowdown through your SIPs can help boost your investment value. Since the bottom cannot be timed, regular SIP investment in this period can help you take the best advantage of rupee cost averaging for your investments.

A market trough often finds its investors wanting to stop their SIPs. However, a fundamental idea behind investing through SIPs is maintaining discipline. This discipline is what helps you take advantage of rupee cost averaging and gauge long term growth potential. No matter which phase of the cycle the market is in, the investing discipline followed by the SIP method allows you to be relatively undisturbed by the marked movements, especially in terms of mutual funds.

Should I stop my SIP when the market goes down?
The knee-jerk reaction for many investors when the market experiences a significant downturn is to panic and consider stopping their SIPs to prevent further losses. However, this is often the opposite of what you should do.

Firstly, market downturns present an opportunity to buy more units of your chosen mutual fund at a lower cost. By stopping your SIP, you miss out on this crucial phase of rupee cost averaging, which can significantly boost your returns when the market recovers. Moreover, halting your SIP and potentially redeeming your existing investments during a market low essentially locks in your losses. Since there is a chance that your portfolio value would have already decreased, selling at this point crystallizes those losses instead of allowing your investments to recover with the market.

Secondly, if you try to predict the market to understand when to restart, you risk staying on the side lines and missing out on the initial stages of the market recovery, which can often be the most significant. SIPs are designed for long-term wealth creation and short-term market fluctuations are an inherent part of the investment journey. Trying to avoid these temporary dips defeats the purpose of this disciplined, long-term strategy.

How does market recovery affect my Mutual Fund SIP
When the market starts to recover after a downturn, your SIP investments begin to show their true potential. Here's how the recovery phase impacts your mutual fund SIP:
• Increased NAV: As the market rebounds and the value of the underlying assets in your mutual fund increases, the Net Asset Value (NAV) of your fund also rises.
• Accelerated Growth: The units you purchased at lower costs during the market slump contribute significantly to your portfolio's growth during the recovery. As the NAV increases, the gains on these previously acquired units can be substantial.
• Compounding Effect: The returns generated during the recovery phase are reinvested, further increasing your asset base. This sets the stage for the power of compounding to work its magic over the long term.

Investor sentiment during market recovery
The shift from a bear market to a recovery phase often brings about a change in investor sentiment. Initially, there might be cautious optimism, with investors still wary of potential setbacks. As the recovery gains momentum and the market shows sustained upward movement, investor confidence gradually returns. However, it is imperative to remain grounded and avoid getting carried away by the positive sentiment during a strong recovery.

While market volatility and downturns can be unsettling for any investor, halting your SIP would oppose the fundamental benefit of investing using SIPs. Remember that market cycles are inevitable, and periods of high growth are often followed by periods of correction. Sticking to your disciplined SIP approach, regardless of the prevailing sentiment, is the best way to navigate these emotional swings and stay focused on your long-term financial goals.

Disclaimers:

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates, shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully.