SIP Dilemma: Should You Pause, Restart, or Continue Amid Market Volatility?

Systematic Investment Plans (SIPs) have long been favoured for wealth creation, but some investors argue they become riskier when market valuations are stretched. The concern arises from investing a fixed sum regularly, even when stock prices are high, potentially leading to suboptimal returns.

Does this mean pausing or restarting SIPs at different market cycles is the answer? Or is consistency the key to long-term gains?

Market Timing: A Difficult Balancing Act

Most investors follow goal-based investing with long-term financial objectives. Attempting to time the market for multiple goals can be both time-consuming and mentally exhausting. Moreover, frequent entry and exit decisions can increase the risk of making emotional and miscalculated investment choices.

SIPs eliminate this burden by ensuring disciplined investing. A passive equity fund SIP should align with your life goal’s timeframe, whereas an active fund SIP is best structured for a 12-month cycle. This systematic approach removes the complexity of market timing and ensures that investments happen automatically, avoiding the pitfalls of forgetfulness and hesitation.

However, the rigidity of SIPs raises another question—what happens when the market is on an extended uptrend?

Value Averaging vs SIPs: Addressing Market Swings

Consider a scenario where you invest ₹20,000 every month through an SIP. This investment continues regardless of whether the market is climbing, correcting, or consolidating. Critics argue that consistently investing in a rising market increases exposure to potential downturns, as high valuations may eventually correct.

An alternative approach—value averaging—attempts to mitigate this risk by adjusting investment amounts based on market conditions. When the market declines, you invest more; when it rises, you invest less. While this strategy sounds appealing, it demands continuous monitoring and decision-making, making it impractical for most investors.

SIPs, on the other hand, function as a volatility-averaging tool. They buy fewer units when prices are high and more when prices dip, leading to cost efficiency over time without requiring constant market analysis.

The Market Timing Trap: What Studies Reveal

Historical studies indicate that missing just ten of the best trading days in a year can significantly lower portfolio returns. Conversely, avoiding the ten worst days can enhance returns. However, the challenge lies in accurately identifying these days in advance—something even professional fund managers struggle with.

Stopping and restarting SIPs based on short-term market fluctuations assumes one can predict market peaks and troughs with precision. But in reality, reacting to short-term volatility often leads to mistimed decisions and missed opportunities.

Final Thoughts: Should You Pause or Continue?

Despite inherent risks, continuing SIPs remains the most practical and disciplined investment approach for most investors. While short-term market swings may create anxiety, SIPs help ride out volatility and smoothen returns over the long run.

That said, as you approach the final 5 years of your financial goal, gradually reducing equity exposure can help preserve gains and limit downside risk. Rather than attempting to time the market, aligning your investment strategy with your risk tolerance and time horizon ensures a more stable financial journey.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments in the securities market are subject to market risks, read all the related documents carefully before investing.