Should SIP investors panic during a market crash? The maths tells a different story

A market crash is usually bad news for investors, as portfolio values fall and returns turn negative. But for investors running a systematic investment plan (SIP), a correction can create an often-overlooked opportunity.

Because SIPs invest a fixed amount at regular intervals, falling markets allow investors to buy more units of mutual funds. If markets recover later, those additional units can lift long-term returns and improve XIRR, the standard measure of SIP performance.

This is one reason why many financial advisers stress that investors should continue their SIPs during market downturns rather than stop them.

Unlike lump-sum investing, SIPs involve multiple investments at different NAVs over time. Since cash flows are staggered, metrics such as absolute return and CAGR do not accurately capture performance. XIRR accounts for both timing and amount, making it the most relevant return measure for SIP investors.

As a result, XIRR is widely regarded as the most relevant return metric for SIP investors.

When markets are rising, the same SIP amount buys fewer units because fund prices are higher. During a correction, however, the same amount buys a larger number of units.

For example, if a fund's NAV is ₹100, a monthly SIP of ₹10,000 purchases 100 units. If the NAV falls to ₹80 during a market downturn, the same ₹10,000 buys 125 units.

Those extra units become valuable when markets recover. Since they were purchased at lower prices, they contribute disproportionately to future gains, potentially lifting the SIP's long-term XIRR.

Consider two investors who each invest ₹10,000 every month for 10 years.

Investor A invests in a market that rises steadily throughout the period.

Investor B invests the same amount every month, but the market experiences a severe correction in the fifth year.

Assume that the fund also reaches an NAV of ₹200 by the end of Year 10.

Despite investing exactly the same amount, Investor B ends up with a corpus that is more than ₹2.5 lakh higher.

The difference arises because the market crash allowed Investor B to purchase substantially more units at lower prices. When the market recovered, those additional units amplified overall gains.

A market crash does not improve returns immediately. In fact, it initially causes portfolio values and XIRR to decline.