Here's why you should not exit from SIP investment and stay invested?
Systematic Investment Plans work on the principle of rupee-cost averaging that requires regular investment of some amount for some pre-determined tenure. With small payments towards the SIP on a monthly basis, average cost of investment is lowered in falling or otherwise highly volatile markets.
Take for instance, if you invest a small amount equivalent to Rs. 500/month, at a price level of Rs. 10 for each of the mutual fund unit, you'll get as many as 50 units. In case the price per unit, drops to 8 and 9 in the next 2 months, you'll be entitled to receive 62 and 55 units respectively. So, as a whole, with lowered average cost for 167 units, investors can garner better returns. However, in case he would have made the lump-sump payment of 1500 units in the first month itself, he would then hold only 150 units. So, comparatively lesser units reduce the chance of more returns.
- Also, early investment into SIP with small amount provides you with higher yield in comparison to lump sum payment in future course on account of compounding, assuming the same rate of return over time.
- Continued investing for the term of the SIP also makes you capitalize on taxation and capital appreciation benefits. As, for investment over a year into SIP, returns or capital gains realised do not attract long-term capital gain tax.
So, for higher returns and in order to accumulate lump sum amount to meet some of the financial goals, you need to follow a certain investment pattern religiously and stay invested into the SIP schemes subscribed by you regardless of the stock market timing.