Market correction sparks SIP cancellations - expert warns investors may be making a costly mistake

A nearly 15% correction in Indian equity markets from their September highs has unsettled many retail investors, triggering anxiety and a rise in Systematic Investment Plan (SIP) cancellations. While the decline has sparked fears of a deeper downturn, investment experts say the reaction among investors may be more concerning than the market fall itself.

According to Dhirendra Kumar, CEO of Value Research, the recent correction should be viewed in the context of the strong rally that preceded it. The Nifty had gained roughly 80% over the previous four years, making a 15% pullback a natural part of market cycles rather than a crisis.

“Investors are overreacting, and that overreaction itself is a bigger risk than the market fall,” Kumar said in an interaction with the Markets Today team. “A 15% correction after such a strong rally is basic arithmetic.”

Despite the market decline, monthly SIP inflows remain above ₹30,000 crore, indicating continued investor participation. However, Kumar noted a worrying trend: in some months, SIP cancellations have exceeded new registrations, particularly among relatively new investors who have never experienced a meaningful market correction.

According to Kumar, this behavioural response often leads investors to earn lower returns than the funds they invest in. Research repeatedly shows a 4–5 percentage point gap between mutual fund returns and investor returns, largely because investors tend to buy after strong rallies and exit during downturns.

“The market gave investors a 15% discount, and the response was to cancel their investment plans,” Kumar said. “That behaviour is the real problem.”

Staying invested through cycles

Market volatility is a normal feature of equity investing, Kumar said, especially as corporate earnings move through cycles. Manufacturing and commodity companies, for example, often go through multi-year investment cycles before profits fully materialise.

For long-term mutual fund investors, worrying about short-term earnings trends or market timing is rarely productive. Instead, investors should focus on their long-term goals and continue investing through market fluctuations.

“Long-term investing means five years or more,” Kumar said. “If markets fall while you are investing through SIPs, it actually means new investments are happening at lower prices.”

However, investors who find market corrections emotionally difficult may need to reassess their investment approach. Kumar suggests that individuals with lower risk tolerance may consider more conservative options that help manage anxiety during volatile periods.

Avoiding the thematic fund trap

Kumar also cautioned investors against chasing thematic or sector-focused funds, which have proliferated in recent years as asset managers launch products built around popular narratives such as defence, electric vehicles, manufacturing or energy transition.

“Most thematic funds are essentially marketing products disguised as investment products,” he said. “They sell a story.”

Timing entry and exit in such funds is difficult even for professional investors. Diversified equity funds, Kumar argued, can already capture opportunities across sectors while maintaining broad diversification.

In many cases, thematic funds also hold the same large-cap stocks found in diversified funds, meaning investors may be paying higher active management fees for portfolios that closely resemble benchmark indices.

Simplicity over complexity

Rather than building portfolios with numerous funds, Kumar believes most investors can achieve their goals with just a few well-chosen funds. “A great portfolio can start with one fund,” he said.

For younger investors in their early twenties, a multicap fund can provide broad exposure across market segments. For individuals starting later, such as those around 40, an aggressive hybrid fund may offer a better balance between equity growth and downside protection.

Ultimately, successful mutual fund investing is less about picking the perfect fund and more about discipline and behaviour, Kumar said.

“Invest every month, save every month and stay the course,” he said. “The biggest risk for investors is not the market. It is how they react to it.”