Investing in mutual funds through systematic investment plans (SIPs) is a very popular mode of investment in India. However, oftentimes, investors choose to cancel their SIP investments due to various reasons, thereby interrupting their wealth creation. Read on to know why you must avoid cancelling your SIP in a short term.
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Here are six reasons why you must avoid cancelling your SIPs in the short term:
- Doing so will interrupt your SIP-based, disciplined investing approach: The power of compounding helps investors benefit from exponential growth based on two factors – consistency and investment horizon. Investing regularly in a mutual fund scheme through an SIP can help you follow a disciplined way of investing. You will be interrupting this streak by cancelling your SIP in the short term, which tends to negatively impact your capacity to earn higher returns.
- You might risk mistiming the market by cancelling an ongoing SIP: You can miss out on good opportunities offered by the market by cancelling your SIP in the short term. You can take advantage of a low market by purchasing assets at lower prices and benefiting from higher gains when the market rebounds. However, you will lose this opportunity if you decide to cancel your SIP investment.
- You will not be able to access professional fund management services: This point is particularly relevant for first-time investors. The fund management of any well-known mutual fund scheme consists of knowledgeable fund managers with decades of experience. If you decide to cancel your SIP on a whim, you will not be able to access these services anymore. This will impact your investment decisions, and eventually, your overall returns.
- A majority of SIP cancellations are influenced by human behavioural biases: Several behavioural biases can influence investors while investing. Certain individuals exit their SIP investments since they are impatient and wish to earn higher returns faster. Others expect impossible gains from their mutual fund investments and cancel their SIP on a whim. Investors generally cancel their SIPs after watching the news (especially bad news regarding the market situation). Therefore, another reason to avoid cancelling your SIPs is that it could be a result of you being influenced by a behavioural bias.
- You will not be able to claim certain tax benefits on cancelling your SIP: This is true especially if you have invested in a tax-saving mutual fund like an ELSS (equity-linked savings scheme) fund. Interrupting your SIP investments will certainly impact your tax benefits too.
- Wealth creation is a long process that requires patience: You must remember that wealth creation is a long process that requires immense patience. You must enjoy the process of SIP investing by being patient and gradually increasing your SIP amount over time.
You must decide on an investment goal and plan your SIP investment using an SIP return calculator to avoid any behavioural biases while investing. Planning your SIPs can help you avoid cancelling them prematurely and benefitting from this mode of investing to fulfil your financial goals.
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