Amount Withdrawn From SIP Accounts Has A Significant Impact On Several Fronts

The real benefit of investing in an equity mutual fund scheme is to build up a corpus over a period of time. Regular investing through the Systematic Investment Plan route is one of the best ways to do this because the investor can ensure that there is a small amount that is invested and that it gets the benefit of cost averaging.

However, there is one other angle related to this that can turn the plans upside down and this is the withdrawal from these folios, which leads to a reduction in the overall balance.

The other side of the investment process is the withdrawal that takes place from the account. The investor will require some amounts for their various needs at different points in time and hence they will withdraw or redeem the amount from their investments.

This would satisfy the need for funds but at the same time, it would also reduce the value of the folio, as this would come down following the withdrawal.

Thus, what this means is that the investor has to balance out the need for funds and the continuation of the investment so that the benefit of compounding remains intact.

The compounding benefit is that the base for earnings keeps going up with each passing year as the income gets accumulated and hence this leads to a larger absolute earning for the investor as time passes. A break in compounding through withdrawal can lead to the achievement of goals being pushed back.

The real benefit of investing in an equity mutual fund scheme is to build up a corpus over a period of time. Regular investing through the Systematic Investment Plan route is one of the best ways to do this because the investor can ensure that there is a small amount that is invested and that it gets the benefit of cost averaging.

However, there is one other angle related to this that can turn the plans upside down and this is the withdrawal from these folios, which leads to a reduction in the overall balance.

There is a distinction that one needs to make between normal and SIP folios, as the situation varies. A SIP folio is one where a SIP is currently underway. The investor is making an investment in this folio through the SIP route, which means that a regular investment is underway.

When a sale is made in this folio, it means that there are two things happening in the same folio. On one side, there is a regular addition to the corpus but at the same time, there is a withdrawal, which means that the balance present in the folio is also being reduced.

This is a bit of a contradiction because of the two different transactions in the same account.

One of the fears of the investor is that the gains that have been seen in the fund will not be sustained and that these will be washed away. This is an effort to time the market because it involves taking a decision as to whether the market has topped out and whether it will fall below the levels that are being seen at the moment. 

A lot of new and inexperienced investors try this activity but others also undertake it because it is a trading mindset that leads to this situation. It is not possible for the investor to time the market so this is a useless effort.

The worry here is that the damage can be significant because the benefit of compounding might be lost and there is anguish if the upward rise in prices continues.

When it comes to equities, it is not possible to avoid the downside because this is part and parcel of the whole investment process.

The best choice when using the mutual fund route is to ensure that there is an outperformance from the fund that has been selected in the portfolio. This would be the best result over a long period of time and the investor would do well to retain their investments in the fund.

There will be some cases where money is needed and in such a situation, the investor uses the profits that have been made to get the necessary money but this should not become a habit and the investment has to grow over a period of time.

The writer is the founder of Moneyeduschool.