How to cancel SIP: Find out right time to stop mutual fund payout to save your money

How to cancel SIP: If we talk about an investment plan with financial advisors, one of the safest and best options they would suggest would be to start investing a little portion of your hard-money in Systematic Investment Plan (SIP) every month. An SIP is usually a monthly investment that happens automatically on a pre-decided date. There are many firms which offer you SIP on equity funds. You just have to open an account with them and they will take care of your investment. By giving a mandate to the fund company for deducting your investment amount from your bank account, SIP gets averaged out from your cost of investment.  Generally, when the markets are high, you get allotted fewer units, and when they are low you receive more units in your portfolio with the same amount. That is the basic premise behind the feature.

One big advantage of going for a SIP in equity funds is that it makes investing a habit. SIP is automated investment that ensures you save the designated amount every month. This way you can invest before you spend, as the SIP date is in the beginning of the month for most investors.

However, considering that markets are very volatile, not all days will be good, one should try and understand when to invest in SIP and when to get out of the platform. 

Ajeet Tomar who is the senior consultant with TASS Advisors, explains what needs to be done when in SIP, and when they should be stopped in various situations. Below are mentioned the senior consultant's views. 

If a fund under-performs consistently for last 6-8 quarters or even more, compare to peers/benchmark  

As per Tomar, all investments are subject to investors sentiments, visions and goals.  Considering each investor has different risk appetite, we rarely recommend a change in the choice of funds on the basis of last few quarter performances.  There have been several instances in the past where a fund did not work well for several years from the date of inception but overall from the long-term perspective, the returns have been remarkable. 

If the market turns negative /bearish

In such circumstances, Tomar suggest to invest more in a specific fund as it provides an averaging out opportunity thereby increasing the probability of good returns in the long run.

Change in fund manager of the particular fund and his investment style

Fund manager plays an important role, his performance is being judged by the ‘alpha’ ratio which is major criteria while selecting/advising a mutual fund to a client. His way of asset allocation is the most important factor on which mutual fund achieve its returns. Hence his fund manager’s experience and investment both matter in driving the mutual fund returns.   

However, Tomar also added, "we generally recommend only good and large AMC houses rather than individual fund managers.Therefore a change in respective fund manager should normally do not tantamount to discontinuance of SIP in a particular fund."

Changes in objective of the fund, Advisors advice the clients keeping in mind specific goals of investors

Such cases usually results in a decline of returns, then it becomes necessary to switch SIP to another fund which fulfills the criteria. And also, the investor loses his or her  confidence in the mutual fund as an asset class because of the uncertainty of the investment objectives. 

Additional factors 

Though the most popular SIP is investing a fixed amount every month, investors can customise the way they put money via SIPs. Many fund houses allow investors to invest monthly, bi-monthly and fortnightly, according to their convenience. 

Apart from this, Step-up SIPs allow investors to increase the SIP amount periodically. ‘Alert SIP’ is another form of the regular systematic investment plan which sends an alert to the investor to buy more when the markets are down.