When there is a big fall in the stock market, most investors get nervous. It is natural to feel worried when you see the value of your mutual fund portfolio falling. Many people even start wondering whether it is right to continue SIP or not. But the interesting thing is that the market crash which is troubling you today can become the biggest reason for better returns from your SIP in future.
If you invest through SIP (Systematic Investment Plan), then the fall in the market can also become an opportunity for you. The value of your existing investments may reduce in a falling market, but each new SIP installment lets you buy more mutual fund units at a lower price.
Benefit of SIP in falling market
In simple words, every rupee of yours buys more units during a fall in the market. When the market goes up again later, these additional units play a big role in increasing your total returns.
What is XIRR and why is it important?
XIRR (Extended Internal Rate of Return) is the method by which the real returns of investments like SIP are measured. Since investments are made in SIP on different dates every month, the simple CAGR does not accurately reflect its performance. XIRR calculates returns taking into account the date and amount of each investment. Therefore, XIRR is considered a more accurate measure for SIP investors.
Why is it harmful to close SIP in market crash?
Many investors stop SIP when the market falls. But this can prove to be the biggest mistake. Continuing to invest during a downturn leads to more units at a lower price. These units give the most profit when the market recovers. According to experts, long-term investors should continue SIP during market decline. If extra money is available, increasing SIP or doing top-up SIP can also be considered.
Long term investors get the most benefit
Investors with goals such as retirement, children’s education or building long-term wealth may benefit most from market declines. They have enough time for the market to recover and grow. A market crash may look like a loss in the short term, but for SIP investors it is an opportunity to buy more units at a lower price. Therefore, instead of panic-stopping SIPs, continuing with disciplined investments can help in generating better XIRR and more wealth in the long run.
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