As defined by Investopedia, “A systematic investment plan (SIP) is a plan where investors make regular, equal payments into a mutual fund, trading account, or retirement account.” Simply put, it is a strategy of investment where investors regularly invest the same amount of money in a specific mutual fund, trading account, or retirement account over a specified duration of time.
The primary reason why investors seek SIPs is to participate in the stock markets without playing an active role in them. In that manner, SIPs go a long way in simplifying the entire process for investors and enabling them to benefit from a passive position. SIPs also tend to provide a strategy of investment that plays to be beneficial in more situations than not.
To do that, SIPs have to be carried out across a long-term timeframe. The reason SIPs work in most situations is because investors play it smart and invest them with a long-term goal that plays out in the end. When you take that approach, you already factor in the volatile nature of the market and account for the short-term ups and downs that may step in. Instead of taking your money out at every downturn, you let it progress naturally towards the aimed goal.
In fact, that demonstrates one of the main reasons why canceling SIP within a short term is a bad idea. Look at it this way. A Systematic Investment Plan, by definition, is a plan that systematically and mathematically charts out asset allocation set across a stipulated time frame with an end goal in mind. That, again by definition, is meant to be carried out over a long-term timeframe. Doing so allows it to be meaningful in its development and hence beneficial to investors.
However, when you do not allow that to happen and you instead look at canceling your SIP within the short term that tends to break the entire process. Think about it. When you look at a short-term cancellation, you are more likely to base this decision on market movement than on a meaningful investment strategy or asset allocation plan. That, in turn, drops your entire focus and moves your attention away from the primary core of a Systematic Investment Plan. As you may imagine, that tends to have a domino effect on the entire investment strategy. So, it always pays off to allow your SIP to naturally progress through its steps and build into the investment you hope to achieve by the end of it.
If you would like to see this in practice, we would recommend you refer to our SIP calculator. The SIP Return calculator by CRED is an integral investment tool that calculates your earnings based on the monthly investment and the investment period. Through the mutual fund SIP calculator, you can gain an insight into the kinds of earnings you can look at achieving through various investment plans. You can then make a sound financial decision and understand which SIP would work the best for you.