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Planning to Pause Your SIP Fearing Job Loss Or Pay Cut? Keep These Pointers In Mind

Adhil Shetty
Image source: Freepik

The Covid-19 pandemic has brought the world to a standstill. A prolonged lockdown to contain this highly contagious disease has severely affected economic activities all over the world. This slowdown has resulted in job losses, pay cuts, and furloughs across various sectors, leaving many uncertain about their future cash flows, investments, and financial goals.

While stock markets across the globe have remained volatile, investors are worried about capital protection. This unexpected market slump has wiped out billions across the globe. The uncertain future and threat of losing a job or income have made investors jittery, leaving many contemplating whether to pause or withdraw their investments completely.

In these challenging times, many are also assessing if they should pause or cancel their investments like their mutual fund Systematic Investment Plans (SIPs) to have more liquidity in hand for meeting more urgent financial obligations.

How Systematic Investment Plans Work

SIPs allow you to invest a defined amount every month in mutual funds of your choice.  SIPs are popular amongst salaried individuals with regular income since they allow them to invest small amounts every month in a systematic, disciplined manner. SIPs provide you with the benefit of rupee cost averaging and long-term compounding required to create wealth in the long-term. It also helps you absorb market shocks and get the desired returns in the long term. A short-term slide in the market reduces the net asset value (NAV) of your fund units, however, which might also allow you to accumulate more units at deep discounts and reap the benefits of their appreciation when the markets rise.

Making Difficult Choices

I have been talking about sticking to your investments that have a long-term impact in these adverse times, including your SIPs. But you might face a situation where you need to decide between making essential payments such as home loan EMIs, or paying your health insurance premium, or continuing your SIPs. I feel you should prioritise these in this manner.

One – continue paying health and term insurance because it’s critical to have coverage during a pandemic. With insurance, you’re protected financially against disease, and if you were to die in an untimely manner, your family will have financial continuity with your term insurance.  Therefore, insurance should be prioritised at all cost.

Two – pay your EMIs and if you can’t, use the moratorium. The moratorium has just been extended for another three months ending August 31. During these six months, you can avoid penalties and credit score damage by not paying your dues. However, your interest will keep adding up during the moratorium. In summary, paying your EMIs is optional, but be mindful of the accruing interest.

Thirdly – and this is the central theme of this article – if you have a stable income and the capacity to continue investing, continue your SIPs. This is good from a long-term perspective. Currently, the NAVs of mutual funds are at a multi-year low, which allows you to buy more units cheaply. However, if your income is strained, take a break from investing because you can’t invest while you have cash-flow problems. One of the great things about investing in mutual funds through SIPs is that you can pause your investments and resume when you can.

Consider Minimising Losses

It would be especially wise to continue investing if you have income stability and have suffered short-term losses on your investments.  For instance, if you have a Rs. 5000 SIP running in a growth fund, your investment at the beginning of the year when the markets were performing decently helped you get 131.57 units at an NAV of Rs. 38.

The same amount invested in March when the markets began to tumble due to the pandemic help you grab 172.413 units at an NAV of Rs. 29. While the markets are still below their previous highs, you have the chance to accumulate these units at discounted rates. Therefore, by stopping your SIPs, you’ll miss the chance to buy cheap units. It will, therefore, be a missed opportunity to improve your long-term returns and minimise the losses you’ve suffered in recent months.

In summary, find your financial priorities. These would be improving cash reserves, maintaining insurance coverage, repaying your debts, and – if possible – continuing your investments.

The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.