when markets drop sharply, sip investors often panic. the portfolio turns red. units bought months ago lose value. it feels like something has gone wrong.
in reality, nothing has broken. a market crash does not pause a sip, alter the fund strategy, or change how units are allotted. on the scheduled date, the sip amount is invested exactly as usual. the only difference is the net asset value.
lower nav means more units
when markets fall, navs drop. the same sip buys more units. ₹10,000 at nav of ₹50 buys 200 units. at nav of ₹40, it buys 250 units. at nav of ₹35, it buys about 285 units. over four months, the average cost drops to ₹41.8 per unit. that is 16% lower than the starting point.
this is rupee-cost averaging. buying more when prices are low. fewer when prices are high. it only works if the investor does not panic and stop.
why the portfolio looks worse before it gets better
during a crash, earlier sip instalments show losses because they were bought at higher navs. that is unavoidable. what often gets overlooked is that recent and upcoming instalments are being deployed at cheaper valuations.
if markets remain volatile for a sustained period, a large portion of total units ends up being accumulated during this lower range. when markets recover, these units contribute disproportionately to returns. long-term sip returns are often driven by investments made during bad phases, not good ones.
the cost of stopping
stopping a sip during a crash feels logical. it feels like protecting capital. but it breaks the very mechanism that makes sips work.
one investor stopped their ₹10,000 monthly sip for a year during a crash. over 10 years, they put in roughly ₹10.8 lakh. their corpus was around ₹19 lakh.
another investor stayed invested. they put in ₹12 lakh over the same period. their corpus was around ₹26 lakh.
the difference in what they invested was only ₹1.2 lakh. the difference in what they accumulated was over ₹7 lakh.
value research ran a scenario where a ₹10,000 sip was paused during every market crash. the final corpus was reduced by over 15% compared to uninterrupted sips.
the behavioural trap
loss aversion is the reason. losses hurt twice as much as gains feel good. when the portfolio is red, the brain screams “stop the pain.” stopping the sip feels like doing something sensible.
the problem is that by the time things “look better,” the market is already up again. the investor restarts near the top. the next fall, the pattern repeats. this is not a market problem. it is a discipline problem.
what the data shows
a dsp mutual fund analysis of rolling seven-year sip returns for the nifty 500 found that entry timing had limited influence on overall returns. when sips were started at market highs, median seven-year returns were around 13%. when started after a 20% rally, returns were about 14%. when started after a 20% fall, returns were still close to 12%. the spread was within one percentage point.
the message is clear. for long-term investors, staying invested and investing regularly matters far more than trying to get the timing right.
the exception
continuing a sip through a crash is not always the right answer. if the investor has lost a job, taken a pay cut, or is dealing with a genuine financial emergency, protecting cash flow comes first. pausing a sip because financial circumstances have changed is different from pausing it because the market is falling.
frequently asked questions
1. should a sip be stopped when markets crash?
no. continuing through a crash is the point of a sip. it buys more units at lower prices. stopping during a fall freezes the average cost at a higher level and locks in the loss.
2. what is rupee-cost averaging?
investing a fixed amount at regular intervals. when markets fall, the same amount buys more units. this lowers the average purchase cost over time.
3. how much can a market correction affect sip returns?
an 18% market correction can cause an early-stage sip’s xirr to collapse by 35 percentage points. this is not because the investor erred. a small, growing corpus works that way. it is simply how the maths works.
4. what happens if a sip is stopped for one year?
a ₹10,000 monthly sip stopped for one year during a crash can reduce the final corpus by over ₹7 lakh over 10 years. the missed instalments are not recovered.
5. should sips be increased during a crash?
if income is stable and the emergency fund is intact, increasing sip amounts during a crash can be sensible. it accelerates unit accumulation at lower prices. it should not strain monthly cash flow.
