How market crashes impact SIP investments over time

Systematic investment plan (SIP) is an investment method where the investor contributes a fixed amount of money at regular intervals, like once a month or once in three months. This method allows investors to benefit from the potential growth of the market over time.

Because mutual funds hold a mix of market-linked assets, they are naturally affected when markets crash. That said, how sharply a fund is impacted depends on its category, underlying strategy, and the assets it holds.

Market crashes are rarely sudden or accidental. They usually emerge from a mix of economic pressures, investor sentiment, and structural weaknesses that come together to unsettle financial markets. Recognising these drivers can help investors spot warning signs early and position their portfolios more prudently.

Market crashes, corrections, and periods of uncertainty are not exceptions; they are an integral part of the investing journey. What matters is not avoiding these phases, but understanding how one’s investment strategy behaves through them. This is where SIPs quietly do some of their most important work.

A market crash typically leads to a fall in a mutual fund’s net asset value (NAV). When the prices of the underlying securities drop, the fund’s overall value declines in tandem. Such sharp movements can be unsettling for investors, especially when portfolio values erode quickly over a short span.

Market crashes frequently lead to heightened investor anxiety, resulting in a surge in redemption requests. To meet these outflows, fund managers may have to liquidate assets at depressed prices, which can further weigh on a fund’s NAV. This process can reinforce itself, as falling values prompt additional redemptions and intensify selling pressure.

It’s also important to recognise that markets do not deliver linear returns. They move in cycles; periods of optimism are followed by corrections, and strong rallies are often preceded by sharp drawdowns. SIPs work through these cycles without requiring investors to predict or time them. By investing consistently across different market phases, SIPs naturally smooth out volatility over time.

But Harsh Gahlaut, Co-Founder & CEO, FinEdge, says, SIPs are designed to benefit from market declines. When markets fall, the same monthly investment buys more units. Over time, this higher accumulation of units at lower prices becomes a powerful driver of long-term wealth creation. While falling NAVs can feel unsettling in the moment, they often lay the foundation for stronger outcomes when markets eventually recover.

Market downturns are often described by market experts as periods that lay the groundwork for future returns, particularly for long-term equity investors. Analysts and fund managers frequently note that the higher returns associated with equities are linked to their inherent volatility and risk. According to this view, if equity markets moved without sharp fluctuations, they would not have delivered the long-term performance they are known for.

Investing is easy, but wealth creation isn’t. SIPs are powerful tools, but they work best when supported by discipline, patience, and a long-term perspective. Investors who continue their SIPs during market downturns and remain aligned to their goals are often the ones who benefit most from eventual recoveries.

Market volatility is not a reason to pause your SIPs; it’s an opportunity to strengthen your investment strategy. By leveraging rupee cost averaging, staying goal-focused, and avoiding the temptation to time the market, you can turn volatility into an advantage.