Why Do Most Indians Quit SIPs Within 3 Years? Analysts Explain The Real Reason
Systematic Investment Plans (SIPs) have gained immense popularity in India as a convenient way to invest in mutual funds. However, a significant number of Indian investors discontinue their SIPs within the first three years, missing out on the potential long-term benefits of compounding. Experts point to a combination of factors, ranging from market volatility and financial pressures to a lack of understanding and unrealistic expectations, as the primary drivers behind this trend.
One major reason is short-term market anxiety. Despite SIPs being designed for long-term wealth creation, many investors get spooked by market fluctuations, economic volatility, and geopolitical events. The instinct to protect their capital during market corrections often overrides the discipline required to stay invested. As CA Abhishek Walia, co-founder of Zactor Money, observes, emotions tend to take over when markets fluctuate. He describes a common pattern: initial excitement in the first year, followed by panic and discontinuation of the SIP when the market dips in the second year, and eventual regret and re-initiation of the SIP when the market recovers in the third year.
Financial pressures in households also play a significant role. The rising cost of living, driven by inflation in essential goods and services like food, healthcare, and education, forces many to reassess their monthly budgets. When money becomes tight, discretionary financial products like SIPs are often the first to be cut. For families already burdened with loans, EMIs, and increasing expenses, continuing a long-term investment plan may seem less important than meeting immediate needs.
Another contributing factor is a misunderstanding of the purpose of SIPs. Many investors treat SIPs like fixed deposits or short-term savings schemes, expecting quick and substantial returns. This leads to disappointment during market corrections, prompting them to exit their investments prematurely. Financial advisors emphasize that SIPs are not meant for short-term gains but are tools for long-term wealth building that reward discipline and patience.
Unrealistic expectations and a short-term mindset further exacerbate the problem. Many new investors who entered the market after 2020, during a period of significant market growth, may have developed unreasonable expectations about the returns they can expect from their investments. As Siddharth Alok, AVP, Investments, EpsilonMoney, points out, it's important to tone down future return expectations, considering that the impressive returns of the past five years may not be sustainable in the long run.
Moreover, the herd mentality and fear of losses can also drive investors to discontinue their SIPs. Seeing others put their SIPs on hold can generate doubt, leading investors to make reactive decisions without considering their individual financial goals and risk tolerance.
The consequences of discontinuing SIPs early can be significant. Investors who exit within the first few years miss out on the power of compounding, which is crucial for wealth accumulation over the long term. As Walia explains, stopping an SIP for just three years due to market fear can result in a substantial loss in potential wealth. Early exits also create gaps in financial planning, potentially jeopardizing long-term goals such as retirement, children's education, or homeownership.
To encourage investors to stay the course, financial experts recommend setting specific investment goals, seeking guidance from reliable financial advisors, and understanding the importance of staying invested through market ups and downs. They also emphasize that market downturns can be opportunities in disguise, allowing investors to accumulate more units at lower prices, which can boost returns when the market recovers. Ultimately, patience, discipline, and a long-term perspective are essential for realizing the full potential of SIP investments.
