When Should You Stop or Pause a Mutual Fund SIP?

Systematic Investment Plan, which is generally termed as SIP, is one type of investment strategy where a particular amount of money is systematically invested at different intervals, for instance, weekly, monthly, or quarterly, in a mutual fund scheme.

​However, an SIP should never be stopped as it can obstruct your financial goals, break the compound interest process, causing you to miss out on potential market rebounds. Thus, fully stopping an SIP would really depend on your future financial plans.

Financial distress, lack of income, changing financial priorities, or the inability to pay monthly expenses may be some of the factors that make one stop an SIP. Yet, the cancellation of an SIP cannot be based on market uncertainties alone.

To understand how to invest in mutual funds, thoroughly evaluate your financial goals, risk tolerance and investment timeframe, which can help you make informed decisions about whether to continue, pause or adjust your SIP contributions.

How SIPs Work 

• Rupee cost averaging: Since the Net Asset Value fluctuates, your fixed amount will be able to buy more units if the market falls and less if the market is rising. This will help in lowering the average cost of purchase of units.
• Long-term impact of compounding: Returns start earning returns themselves after some period of time, and that results in wealth creation.
• Eliminate the dependence on market timing: It prevents you from making any impulsive investments, thus allowing you to stay disciplined through all kinds of market movements. Investing in mutual funds not only requires understanding of SIPs but also of market volatility and the importance of investing for the long term.

Valid Reasons To Stop Or Pause A SIP

• Unexpected financial setbacks: A serious financial crunch, income decline or sudden unemployment and lack of an emergency fund can lead to a temporary pause or complete stop on installments, preventing debt or default.
• Fund underperformance: It is prudent for you to analyze and re-strategize how you invest in those mutual fund investments which are underperforming when compared to their benchmarks and other mutual funds within three years. 
• Changes to fund’s fundamentals: A fundamental change in the investment objective, risk profile, or even a change in the primary fund manager can alter the way the fund functions.
• Goal accomplished or goal horizon nearing: You can stop SIP if you have already achieved your desired financial goal, such as accumulation of funds for a child’s education, upfront cost or buying a car.
• Asset allocation shift: If there is an imbalance in your portfolio, like having additional equity investments than your risk level permits, you may need to rebalance your investments, redeem units, or shift funds.
• High-interest debt: Repaying high-interest debt such as credit card bills and personal loans may turn out to be more useful than pursuing the SIP scheme. You may consider suspending or reducing such activities for some time.
• Duplication/overlap: If you have too many mutual funds with similar stocks in your portfolio, it may lead to duplication of investment in the same kind of stocks. Hence, you need to examine your investments and think of ways to consolidate funds to make your portfolio more diverse

Bad Reasons To Stop An SIP

1. Market crashes – Stopping your SIP during a market downturn may cause you to miss the opportunity to buy more mutual fund units at lower prices. Continuing your SIP enables you to benefit from rupee cost averaging, as your fixed investment amount buys more units when prices drop and fewer when prices rise. Eventually, this can help build your holdings, although it does not fully assure profits or protect you from market losses.
2. Short-term underperformance – It would be a mistake to stop a fund only because it fell short behind by a few months or a single year. You should only consider ending a fund if it has been performing consistently below its benchmark along with other funds for 3 years and beyond, rather than responding to periodic market declines.
3. Fear driven by news or social media – If you instantly react and tend to stop your investment plan due to overhyped media reports or predicting market movements, it almost fails all the time. Missing the initial days of a strong market recovery can significantly reduce your long-term investment returns.
4. Chasing last year’s top-performing fund – Keeping an expectation for linear, uninterrupted positive returns every single time can lead to extreme disappointment. Equities normally move in stages, and wealth creation through mutual fund SIPs needs long-term commitment (usually 5-10 years or more) to leverage the benefits of compounding.

Read Also: What Is Stock SIP?

Pause Vs Stop: What’s The Difference?

Pause

There can be various reasons why a person might need to pause their SIPs. This includes cash flow problems, changes in income, revised financial objectives or an evaluation of the portfolio. However, pausing is a better choice in cases where the financial problem is only temporary, the expense has created a shock to the monthly cash flow and the investor will resume investing soon after.

For investors who intend to pause MF SIPs, it is vital to see whether the mutual fund house or the investing portal allows them to do so and to understand the conditions for doing this. Once an SIP has been paused, the existing holdings continue to be invested. The period during which an SIP can be paused varies from AMC to AMC and scheme to scheme.

Stop

When an investor no longer wants to make any future investments in that scheme,  when the financial goal or asset allocation has changed noticeably or when the investor chooses to realign the portfolio, then learning how to stop SIP can be considered.

When an SIP is stopped, the units still remain invested until separately redeemed. But the processing time for stopping SIPs is longer, normally up to 21 days. Therefore, ensure you send a timely request.

Canceling an SIP only stops future investments; your existing mutual fund units remain invested and continue to be affected by market fluctuations. You can redeem them separately whenever required, based on the fund’s terms and relevant exit charges.

What To Do Instead Of Stopping

Before making any decision on how to stop SIP, try to check whether the investment can be adjusted to meet your financial needs. 

Additionally, before canceling an SIP permanently, you can even try to pause MF investments, decrease the SIP amount, transition to a better-performing fund within the same category after assessing its compatibility, or use an adjustable SIP amount to increase or decrease your contributions according to your income and a change in your financial goals.

Tax And Exit Load Considerations

Each SIP installment is treated as an independent investment, with its own holding period for tax purposes. If you redeem your mutual fund units, you may have to pay an exit load, depending on the fund’s terms and how long you have possessed the units.

Common Mistakes

• Stopping at market lows: If you withdraw or pause when the market declines, you may lose out on rupee cost averaging, resulting in purchasing more fund units at a lower cost. Market corrections can offer good prospects to build wealth instead of causes to panic.
• Neglecting the cost of lost compounding: Even a short break can substantially lower your target corpus because of lost contributions and missed compounding growth over a period of time. For instance, stopping or halting in between can result in the loss of millions from your wealth over time.
• Waiting for the right time to invest: Based on short-term stock market forecasts, trying to pause, stop or restart contributions almost always leads to below-average returns. SIPs help investors avoid emotional decisions by promoting consistent investing.

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