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.

Why XIRR is the preferred measure for SIP returns

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.

How a market crash helps SIP investors

The concept is rooted in rupee-cost averaging.

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.

A numerical example

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

Both invest a total of ₹12 lakh over the decade.

Investor A: No major correction

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

Let’s assume the NAV reaches ₹200 at the end of Year 10.

Investor A’s corpus would be worth:

8,626 units × ₹200 = ₹17.25 lakh

Investor B: A sharp crash in Year 5

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.

Investor B’s corpus would be:

9,886 units × ₹200 = ₹19.77 lakh

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.

Why long-term investors benefit the most

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

The benefit emerges only when investors continue their SIPs through the downturn and remain invested long enough for markets to recover.

This is why corrections are often more beneficial for investors who are still in the accumulation phase of their financial journey. Investors with long horizons, such as those saving for retirement or children’s education, can use market declines to accumulate more units at lower costs.

The longer the recovery period after a correction, the greater the potential impact on overall returns.

The biggest mistake investors make

Many investors stop their SIPs when markets fall sharply. This behaviour can undermine one of the key advantages of SIP investing.

By discontinuing SIP contributions during a correction, investors miss the opportunity to buy units at discounted valuations. They often resume investing only after markets have recovered, when prices are significantly higher.

In effect, they forgo the very mechanism that can help improve long-term XIRR.

The bottom line

Market crashes are painful in the short term, but they can be beneficial for disciplined SIP investors. Falling markets enable investors to acquire more units with the same monthly contribution, reducing the average purchase cost of investments.

When markets recover, those additional units can enhance wealth creation and potentially improve the SIP’s long-term XIRR. For investors with long investment horizons, periods of market stress often lay the foundation for stronger future returns, provided they continue investing through the downturn.