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3 Reasons Why Investors Stop Their Goal-Linked SIPs

With assets under management nearing the 1.8 trillion mark, and the number of active SIPs crossing 1.25 crore recently, the Indian mutual fund industry has been picking up pace lately

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With assets under management nearing the 1.8 trillion mark, and the number of active SIPs (Systematic Investment Plans) crossing 1.25 crore recently, the Indian mutual fund industry has been picking up pace lately. Over the years, SIPs have proven to be a highly effective means of drawing out first time investors who have traditionally invested only in low return asset classes such as deposits and life insurance, and nudge them towards higher growth equity investing.

Some of these SIPs are initially started off keeping future foals in mind, such as a child’s education or marriage, or one’s own retirement. Though many of these goals are long term in nature, the lion’s share of these SIPs end up getting stopped within a year or two, defeating the goal-planning purpose entirely. Here’s a brief exploration of why many a goal-based SIP meets its untimely demise.

Loan prepayments

Having accumulated a reasonable amount of liquid money through SIPs over a two or three-year timeframe, many clients decide to stop or pause their SIPs for a while and pre-pay expensive loans instead. This is actually a valid reason to stop a SIP, as one could save a significant amount of interest cost by quashing high interest loans such as personal loans or loans taken on one’s credit card. Just make sure you’re not stopping the SIP and redeeming our money after markets have fallen significantly, or you may end up incurring more in terms of foregone returns than the money saved by prepaying the loan. Also, be smart in your loan prepayment choices – start with the most expensive ones first. Also, remember that there’s no point prepaying a loan on a depreciating asset such as a car, unless the loan is in its very early stages (and therefore, interest heavy). 

Home loan or home purchase

Stopping your SIPs to buy a home may not always be a smart decision. For starters, you need to ask yourself if you’re buying the said house as an investment or as an end user. Taking out a loan at 9% per annum to buy a home as an investment means that you need the asset to grow at a very high rate of return to outpace the interest cost you’ll be incurring on your EMIs. And although buying a home as an end user is a valid aspirational goal, you need to be smart about the timing of your actual decision. Don’t forget to take the annual deduction of Rs.200,000 under Section 24 into account while making your decision. In a nutshell, think twice before you liquidate your SIPs and take on a hefty home loan instead.

Lifestyle expenses

The liquid and flexible nature of most mutual fund SIPs works to their detriment at times, by offering investors the lure of using the saved funds for lifestyle expenditures such as a new car or an expensive family holiday. More often than not, stopping your goal-linked SIPs to fund your lifestyle expenditures will turn out to be a regrettable decision.

Compounding works in mysterious ways, and the actual rupee cost of liquidating goal-linked savings midway can be staggeringly high. Make sure you do the math on exactly how much you’re sacrificing in terms of future growth or corpus creation before you take your final decision.

Tags assigned to this article:
mutual funds SIP investing loans insurance public finances