Cancelling SIP Within a Short Term Is a Bad Idea: Here's Why

Investing in mutual funds through Systematic Investment Plans (SIPs) is a widely recommended strategy for long-term wealth creation. However, many investors are tempted to cancel their SIPs within a short period due to various reasons. In this article, we will look into why cancelling SIPs early is a bad idea and highlight the long-term benefits of staying invested.

Causes for Early Cancellation of SIPs

Many investors decide to stop their SIPs within months of starting them. This decision is often influenced by unrealistic expectations of immediate gains. New investors, in particular, are easily swayed by negative news about the economy, such as falling GDP, a gloomy economic outlook, or unlikely increments at their workplaces. When faced with such news, their first reaction is often to halt their SIPs.

Additionally, some investors lack patience and expect their investments to double in a short time. When these high expectations are not met, they become disillusioned and stop investing. There are also experienced investors who mistakenly believe that SIPs guarantee only positive returns and are not prepared for the possibility of their investments losing value in the short term.

Expectations of Impossible Gains

A common reason for early SIP cancellations is the expectation of impossible gains. Many new investors enter the market with the hope of doubling their money within a few months. This unrealistic expectation is often fueled by sensational news stories or anecdotal successes of a few investors. When their investments do not perform as expected in the short term, they feel disillusioned and decide to stop their SIPs.

Influence of Negative News

New investors are particularly vulnerable to negative news. Economic downturns, falling GDP, or a gloomy economic outlook can trigger panic. When faced with such news, investors may fear that their investments will continue to lose value and decide to halt their SIPs to avoid further losses. However, this reaction is often based on short-term market fluctuations rather than a long-term perspective.

Impatience and Lack of Understanding

Some investors lack the patience required for long-term investing. They expect their investments to yield high returns quickly. When this does not happen, they become impatient and stop their SIPs. Additionally, there are investors with reasonable experience who feel that investing through SIPs guarantees only positive returns, without understanding that market fluctuations can lead to short-term losses.

Reasons Why Cancelling Within the Short Term Is a Bad Idea

1. Missing Out on Rupee Cost Averaging

Rupee Cost Averaging (RCA) is one of the key advantages of SIPs. RCA involves investing a fixed amount regularly, regardless of the market conditions. This strategy ensures that you buy more units when prices are low and fewer units when prices are high, averaging out the cost of your investments over time.

By cancelling your SIPs early, you miss out on the benefits of RCA. For instance, during market downturns, continuing your SIP allows you to purchase more units at a lower price, which can significantly boost your returns when the market recovers. Cancelling your SIPs during such periods means losing the opportunity to accumulate units at lower prices.

Consider this example: If you invest ₹5,000 monthly in a mutual fund, you will purchase more units when the Net Asset Value (NAV) is low and fewer units when the NAV is high. Over time, this helps average out the cost of your investments, reducing the impact of market volatility.

Rupee Cost Averaging Example

Month	Investment Amount (₹)	NAV (₹)	Units Purchased
Jan	5,000	50	100
Feb	5,000	45	111.11
Mar	5,000	55	90.91
Apr	5,000	50	100
May	5,000	48	104.17
Total	25,000	-	506.19

In this example, the average cost per unit is ₹49.37, lower than the initial and highest NAVs. This demonstrates the benefit of RCA.

2. Loss of Compounding Power

Compounding is the process where the returns on your investments generate their own returns. The longer you stay invested, the more powerful the effect of compounding. SIPs leverage the power of compounding by allowing your investments to grow over time.

For example, if you invest ₹10,000 monthly through SIPs at an average annual return of 12%, your investment grows significantly over the years:

Effect of Compounding on SIP Investments

Year	Amount Invested (₹)	Value at 12% CAGR (₹)
5	6,00,000	8,14,409
10	12,00,000	23,23,391
15	18,00,000	48,98,973
20	24,00,000	96,82,272

Cancelling your SIPs prematurely cuts short the compounding process, reducing your potential returns significantly. Compounding works best when given time. The more time you allow your investments to grow, the greater the compounding effect. By cancelling your SIPs early, you miss out on this powerful benefit.

3. Difficulty in Timing the Market

Many investors try to time the market, aiming to buy low and sell high. However, accurately predicting market movements is extremely challenging and often leads to suboptimal investment decisions. By cancelling your SIPs and attempting to re-enter the market at a more favorable time, you risk missing out on market rallies.

Historical data shows that markets tend to recover quickly after downturns. For instance, the Nifty 50 index fell by nearly 40% during the 2008 financial crisis but recovered to its pre-crisis level within two years. Investors who stayed invested through SIPs during this period benefited from the market rebound.

4. Financial Discipline

SIPs instill financial discipline by encouraging regular investments. This disciplined approach helps you build a substantial corpus over time. Cancelling your SIPs disrupts this discipline, making it harder to achieve your long-term financial goals. For example, let’s consider two investors, A and B. Investor A continues SIPs regularly, while Investor B cancels SIPs during market downturns. Over a 20-year period, Investor A is likely to accumulate a larger corpus due to consistent investments and the benefits of RCA and compounding.

Table: Impact of Consistent SIPs on Wealth Creation

Year	Investor A's Corpus (₹)	Investor B's Corpus (₹)
5	8,14,409	7,00,000
10	23,23,391	18,00,000
15	48,98,973	35,00,000
20	96,82,272	70,00,000

Investor A's disciplined approach results in a significantly larger corpus compared to Investor B, who cancels SIPs during downturns.

5. Loss of SIP Flexibility

SIPs offer flexibility in terms of adjusting the investment amount, pausing investments, or even switching funds. Cancelling your SIPs eliminates this flexibility, forcing you to start from scratch if you decide to reinvest later.

For instance, if you face financial constraints, you can reduce the SIP amount or pause investments temporarily instead of cancelling them altogether. This approach helps you maintain your investment discipline without compromising your financial stability.

Table: SIP Flexibility Options

Situation	Option	Benefit
Financial constraints	Reduce SIP amount	Maintain investment discipline
Short-term cash flow issues	Pause SIPs temporarily	Avoid cancelling investments
Change in investment goals	Switch funds	Align with new goals

By leveraging SIP flexibility, you can continue investing without disrupting your financial plan.

Wealth Creation Takes Time

As an investor in mutual funds, you must understand that while the market tends to be volatile over short periods, it holds immense wealth creation potential in the long run. Historical performance of the markets over the last 40 years reflects this potential, with investors generating about 16% returns annually on average. If you cancel your SIPs when the market is low, you may miss out on the opportunity to earn higher returns during market rallies.

For example, consider the following scenario:

Long-Term Wealth Creation Example

Year	Market Condition	SIP Amount (₹)	Units Purchased	NAV (₹)	Value (₹)
1	Bearish	12,000	600	20	12,000
2	Bullish	12,000	480	25	15,000
3	Bearish	12,000	600	20	12,000
4	Bullish	12,000	480	25	15,000
5	Bullish	12,000	400	30	18,000

In this example, despite market fluctuations, the value of the investment grows over time, demonstrating the potential of staying invested through SIPs.

Historical data supports the long-term potential of SIPs. For example, the S&P BSE Sensex, one of India's leading stock market indices, has shown an average annual growth rate of around 15% over the past 40 years. Investors who remained invested through SIPs during this period benefited from the compounding effect and the market's long-term growth.

Conclusion

Cancelling SIPs within a short term is a bad idea for several reasons. You miss out on the benefits of Rupee Cost Averaging, lose the power of compounding, and face the difficulty of timing the market. Additionally, you disrupt your financial discipline and lose the flexibility that SIPs offer.

Wealth creation through mutual funds requires time and patience. By staying invested through SIPs, you can leverage the long-term growth potential of the market and achieve your financial goals. Therefore, it is essential to resist the urge to cancel your SIPs prematurely and remain committed to your investment strategy. Remember, successful investing is not about timing the market but about time in the market. Stay disciplined, keep your financial goals in mind, and let the power of SIPs work for you in the long run.