Mutual fund SIPs are one of the best ways to create long term wealth. The benefits of an SIP are many. It encourages disciplined savings. SIPs also work on the principle of rupee cost averaging and help one to avoid trying to time the market. SIPs can thus used to meet one’s long-term goals. However, an SIP is not magic investment that works in every scenario. We tell you three situations where investing in an SIP is not a right option.
1. When you are near your goal: Remember, that SIPs in equity funds can give you potentially high returns over a long period of time. Long-term investment in equity cancels out any short-term market volatility. Hence SIPs are ideal to meet long-term goals like planning for retirement or saving for your child’s future. However, when your goal is two to three years away, you should stop investing in SIPs. At this time it is important to move your investments to avenues that give steady returns and are not affected by market volatility. Even if the SIPs are giving good returns and there is a temptation to continue, you should not continue because if the markets fall, you may be left in a situation where you are unable to meet your goals.
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2. When you do not have a surplus to invest: SIPs require a regular monthly commitment. So if you are in a financial situation where you have little or no surplus to invest, you should stop your SIPs. This could be due to some unexpected healthcare expenses or when you are starting a business and need the funds to make your business grow. You may also be in a situation where you have to pay off high cost debt on priority. If you still carry on with the SIP investment and are unable to meet your regular expenses, then it may put you in undue financial stress.
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3. When the fund performs badly: SIPs make investing easy, but the performance of funds should be periodically monitored. If a fund is constantly underperforming the benchmark, for more than four or five quarters, you should consider stopping your SIPs in that fund. If a fund is giving you very poor returns, it will affect the performance of your portfolio. However, remember that once you stop an SIP, you should start with another SIP, which has got a similar investment mandate so that your investments stay on course.
As we have seen, SIPs can help you achieve your financial goals, but you may need to make adjustments to your SIP portfolio when the situation demands so.
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