A systematic investment plan (SIP) is an investment vehicle that can reap bountiful returns for the long-term investor. An SIP entails investing a fixed amount of money, on a periodic basis into a mutual fund scheme (or any other asset). The two primary benefits that it provides is compounding and rupee cost averaging. The longer you stay invested in an SIP, the more your principal, as well as, the growing interest is likely to earn returns. Additionally, by investing consistently, an SIP precludes the need to time the market. Essentially, fixed periodic investments through an SIP ensure that you buy at market tops and bottoms, thereby averaging the overall purchase price of your investment. Undoubtedly, staying invested in an SIP for the long-term is the way to go. However, there can sometimes be certain situations, that may require you to terminate your ongoing SIP. These include:
While you should not be in a hurry to terminate your SIP just because of underperformance in a quarter or two, you must re-evaluate it if the funds were to consistently underperform its peers and its benchmark over a period of time, like for example 3 to 4 quarters. Staying invested in a fund that cannot match the performance of its peers and the benchmark is an opportunity cost that can have a large impact on your portfolio returns over the long-term.
When we decide to start an SIP in a particular mutual fund scheme, we like to ensure that the objective of the scheme is aligned with our investment objective and that it is capable of meeting our return requirements within the defined risk parameters. This alignment of objective is integral if you are to meet your financial goals. However, it can happen that during the life of the fund, the scheme objective changes and is perhaps no longer aligned with your investment. This would mean that you need to assess your SIP in the scheme and terminate the same, if required.
Often, investments in an SIP are tagged to s specific financial goal. For example, you might start an SIP today to save for a down payment on your home, ten years from today. Now, as you approach the goal, maybe in the ninth year, it would be prudent to withdraw your money from that particular SIP and invest it in a liquid and relatively risk free investment so that the money is available to you in a year when you are ready to purchase your home. Basically, when you have tagged your SIP investment to a goal, you must terminate the particular SIP on reaching that goal. This brings continuity and predictability to your financial plan.
While the overarching rule is to continue with your SIP investments in all market conditions, there are a few situations, like the ones mentioned above, that might require you to terminate your SIP. However, you should ensure that any investment decision that you take is aligned with the overall objective of your portfolio.