Know when you must exit your SIPs

Neither can you time the market, nor can you tame it. This explains why many people prefer making systematic investments into mutual funds. Sold as Systematic Investment Plans (SIPs) by banks and mutual fund houses, these involve investing a fixed amount regularly irrespective of the market trends in response to bullish or bearish market movements. Ravi Gopalakrishnan, head - equity, Principal Mutual Fund, says, "It is a disciplined way to invest regularly and take advantage of market fluctuations, especially, during volatile market conditions. It is a great way to invest and highly recommended for long-term wealth creation."

Choosing investments is mostly tied to a financial goal that helps decide the amount and tenure of the investments being made. Staying invested in SIPs for a prolonged period ensures good returns in the long run. Rutvij Bhutaiya, senior manager -investment advisory, Capital Quotient, says, "SIPs work like a magic in the long-term perspective, especially, because of the rupee cost averaging concept. Long-term investors hope for markets to fall in the short term so that SIP investors can take benefit from a lower NAV and a high number of units."

Exiting your SIP investments

A lot many people are still unsure if they should exit their choice of SIPs if not needed, or how to decide when to stop paying towards their SIPs. It is important to be able to identify situations where you must terminate your current SIPs and switch on to more potent investment solutions. Some of these may include:

Constant devaluation: The returns on a mutual fund is directly proportional to the performance of the stocks that make up the mutual fund. However, there may be instances where your mutual fund may continue to underperform as compared to its peers or market performance. Assessing the performance of a mutual fund over three to four quarters helps evaluate its quality. Rachit Chawla, founder and CEO, Finway, says, "First, you should be very much clear about your goals, i.e., how much returns on investment you want in a stipulated time. Then, identify the MF options that best suits your requirements. If you follow this practice, then the possibilities of encountering poor returns are minimum. Remember, stopping SIP is not a wise decision because ups and downs are the regular features of the market, and the longer you stay in the market, the better you gain from the market."

Not at par with investment objective: Every mutual fund scheme that you invest in must align with your financial goals. This means that the mutual fund must be able to earn the desired returns within the given quantum of risk. However, if the performance of your choice of mutual fund scheme is different from what was initially intended, it's time to stop paying towards it. Rajeev Srivastava, head retail broking, Reliance Securities, says, "SIPs are a key investment vehicle for investors, especially for retail investors, that can slowly build wealth for themselves for attaining their financial goals. Through SIP, an investor enjoys the advantage of rupee cost averaging and subsiding risk of volatility in the market in the long run. While it is advisable to increase the SIP amount when the markets are low and fund units are available at a cheaper price, vis-a-vis for the higher valuation of the markets, one can review or stop the SIP in case of adverse situations when the markets are either stagnant or not giving returns for the long term, in addition to the low expectations on economic growth or unfavourable political scenario; most importantly, when your SIP investments are not on track to accomplish desired time-bound goals."

On reaching close to your financial goal: Investment in mutual funds is mostly done with a financial objective in mind. Considering that most mutual fund investments are done for a prolonged period, it makes sense when many people say that they have chosen mutual fund investments over other financial options to pay off expenses towards their wards' higher education and marriage or to make down payment for buying a home. Assuming that the tenure of each of their mutual fund investments is 10 years, it makes sense that these investors are looking for their desired returns in a lump-sum at the end of the investment duration. However, if you are not attuned to the undulating market movements, you may lose out on what you had possibly earned during the initial years of your investment. This calls for the need to exit and redeem the mutual fund and invest the earnings in a comparatively more liquid and risk-free investment tool for future use just as you are nearing the end of your investment tenure. CS Sudheer, founder and CEO, Indianmoney.com, says, "Investment is SIPs are tagged to specific financial goals and must be terminated on achieving them. This brings predictability and continuity in your financial plan. Withdraw money from the SIP as the financial goal approaches and invest in a risk-free investment."

The first rule of investing in a mutual fund is to continue for a minimum of five to seven years, notwithstanding the tumultuous nature of the stock market, for better yield. However, certain situations may warrant you to terminate your SIPs and look for better investment options that combine stability along with good returns. The decision to stay invested or to terminate your SIP in between must be in sync with your investment objective and the changing components of your financial portfolio.

points

• If the performance of your choice of mutual fund scheme is different from what was initially intended, it's time to stop paying towards it
   
• In case of adverse situations when the markets are either stagnant or not giving returns for the long term, it's time to look for other financial avenues for better returns