Last Updated on February 12, 2022 at 6:19 pm
So all it took was just a few days of southbound market movement for questions like, “Should I Stop My Mutual Fund SIPs? Market is falling every day!” to start! Yesterday, I saw five such questions in Quora and readers have sent me similar emails. So if you are asking this question, here is why I believe that you should stop all your sips. If someone around you is asking such questions, do share this post and the video within to them.
Why you should stop your SIP now if you are worried about the market falling
So I posted a video about this last night, but before you get to that, some commentary if you don’t mind.
1: You are asking this question because you do not have an investment strategy!
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2: If you stop your SIPs now, when will you restart? When the market has moved up again? That would be silly! In equity, you need to buy as many mutual fund units as possible when the market is falling (and your need is several years away) or when the market is not going anywhere. In the video below, I talk about the stock market as a wide staircase. This is what I mean: Are you ready to climb the Sensex Staircase?!
3: Stop your SIPs, and do the following
- Have a clear financial goal, be clear about when you will need the money.
- Find out how much money you will need for the goal using a reasonable inflation rate.
- Does your goal need only fixed income or does it need equity as well?
- If it needs equity, how much return can I expect after tax?
- How much equity should my portfolio have?
- How should I reduce the equity as my goal deadline nears?
- How much should I invest for this goal in total?
- For all the above steps, you can Download the Freefincal Robo Advisory Software Template and work on it in the weekend
- Are my current funds suitable for this goal?
- If yes, continue, if not exit and use new ones.
- If you want new ones, you can select from My Handpicked Mutual Funds September 2018 (PlumbLine)
4: Does the above seem too much, too soon? Okay, then you re-assemble your financial life with this free -ebook and resume your SIPs if you want to. If you have a clear purpose, you do not need SIPs, you will be disciplined enough to invest on your own each directly at the AMC sites.
5: Did you think that the market would just keep moving up? Excuse me, that is stupid. You need to super-patient if you want equity to work. This is the gain or loss in my full equity portfolio. You can see more details at : Ten Years of Mutual Fund Investing: My Journey and lessons learned
Notice that for the first five years, returns were zero and then it zoomed up. That period when you do not get any returns is the best time for you to invest in equity! Unless you are ready to appreciate this, exit from equity.
Now watch: Should I Stop My Mutual Fund SIPs?
Do consider exploring the other videos in the freefincal youtube channel, there are about 300+ of them.
How to reduce risk when you are running a SIP?
It is not enough if you simply start a SIP, you should also manage the risk associated with it. Always, focus on the money in the market, that is your current investment value and do not focus on your next investment.
Continue your next investment, but keep an eye on your asset allocation. That is how much of equity does your portfolio have. Or equity value divided by portfolio value (for a particular goal). Say you want this to be 60% and this has increased due to a bull run to 70%; Then remove that 10% and invest in fixed income. This is known as rebalancing.
Do this rebalancing at least once a year and that will reduce quite a bit of risk. Then if you hold 60% equity for a goal that is ten years away, after a few years (say 4) reduce it to 40% and then after 3-4Y reduce it to 20% and then down to zero.
So reducing risk is a simple three-step process:
1: Invest right (use the robo template to find out)
2: Rebalance each year
3: Reduce equity exposure in a step-wise manner ignoring tax and exit load.
4: You can continue investing while you do all this as per the current asset allocation (equity and fixed income ratio) It is as simple as that!!
Resources to manage your portfolio
To understand what is asset allocation, watch:
To learn more about portfolio rebalancing, watch this:
If you want to know how much equity you should hold, watch this.
To learn more about how to reduce risk in the portfolio, watch:
Unless you are ready to understand the risks associated with equity investing, please stop your SIPs. Ignorance is the biggest risk. Ignorance is not a crime, staying ignorant is. A crime you commit against your dreams and the well being of yourself and your family.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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