Loss aversion and SIPs: why investors stop right when markets dip

This piece looks at why the pause happens, what it costs, and what a SIP is actually designed to do with a falling market.

Markets fall. Somewhere in that fall, a predictable number of investors log into their SIP dashboard and hit pause. Not because the math changed. The math for a monthly SIP into an equity fund is identical whether the Nifty is up 10% or down 10%: same amount, same date, same number of units bought at whatever the price happens to be. What changed is how the loss felt.

Key Takeaways

• AMFI data shows SIP stoppage ratios have repeatedly spiked during market corrections, including a rise from roughly 51% to 82% between July and December 2024 as tariff fears and stretched valuations weighed on sentiment.

• Prospect theory, from Kahneman and Tversky's 1979 research, found that losses are felt roughly twice as intensely as equivalent gains, though more recent replication work puts the multiplier lower for some contexts.

• A SIP is designed to buy more units when prices fall. Pausing it during a dip removes the one mechanism that turns a falling market into a lower average purchase cost.

• Long-term market gains cluster in a small number of days, many of them arriving right after the sharpest falls, which is exactly when a paused SIP is sitting out.

What does AMFI's SIP stoppage data actually show during corrections?

It shows a stoppage ratio that tracks market sentiment closely, not investor tenure or plan quality. The SIP stoppage ratio, discontinued or completed SIPs divided by new SIP registrations in a month, climbed from about 51% in July 2024 to 82% by December 2024, a period marked by tariff threats, slowing global growth, and stretched valuations (India Infoline, 2025). AMFI's more recent monthly data for early 2026 shows the ratio moving with the same pattern: 74.83% in January, 75.62% in February, and back above 100% in March and April, a threshold that means more SIP accounts closed than opened that month (Finnovate, 2026).

Some of this churn is mechanical. AMFI ran a large-scale cleanup of roughly 1.43 crore dormant folios between January and April 2025, which temporarily inflated the ratio for reasons unrelated to investor sentiment (Finnovate, 2026). But the underlying pattern across multiple correction periods, including the sharp climb in late 2024 and again through early 2026, points the same direction: stoppages accelerate when portfolios are down, not when they are up.

What is loss aversion, and why does it target your SIP specifically?

It targets SIPs because a SIP forces you to look at a loss and act on purpose, every single month, instead of once. Daniel Kahneman and Amos Tversky's 1979 prospect theory found that people evaluate outcomes against a reference point, usually where they started, rather than in absolute terms, and that losses register roughly twice as strongly as equivalent gains (Cogn-IQ Encyclopedia, 2026). Their 1992 follow-up estimated the loss-aversion multiplier at 2.25, though a 2024 replication review found the true figure varies widely by context and is often smaller (Accountablo, 2026).

A lump-sum investor checks their loss once and can look away. A SIP investor gets a fresh decision point every debit cycle: authorize the same amount into a fund that, on paper, is now buying at a lower NAV. That repeated exposure is the mechanism. It is not that SIP investors are less disciplined than lump-sum investors. It is that the SIP structure itself creates more chances per year for loss aversion to override the original plan.

Why does rupee cost averaging need the dip to work?

Because the entire mechanism depends on buying more units when the price is lower. A fixed monthly SIP amount buys fewer units when the NAV is high and more units when the NAV is low. Over a full cycle of ups and downs, this averages the purchase cost down compared to investing the same total amount in one lump sum at an arbitrary point. Pausing the SIP during the low-price months and resuming once prices recover does the opposite of what the strategy is built for: it skips the cheap units and keeps only the expensive ones.

This is also why "wait for the market to stabilize before restarting" rarely works as intended. There is no reliable signal for when a correction has bottomed out. By the time it feels safe to resume, a meaningful part of the recovery has usually already happened, and the investor has converted a temporary paper loss into a permanent, realized gap in units bought.

What does missing the recovery actually cost, in the numbers?

More than most investors expect, because market gains concentrate in a small number of days that tend to follow the worst ones. Long-run US market studies, which illustrate a pattern also seen in other equity markets, found that missing just the ten best trading days over a multi-decade period can cut annualized returns roughly in half, and that a large share of those best days occur during bear markets or in the first weeks after one (Hartford Funds, 2026). Separate analysis of the 2008 to 2019 period found that most of the ten best trading days occurred within ten trading days of the ten worst ones (Pomegra, 2026).

Applied to a SIP, this means the exact window an investor is most likely to pause in, a sharp correction, is statistically close to the window that produces a disproportionate share of the eventual recovery. Past performance of any market or index is not a guarantee of future results, but the pattern of gains clustering around drawdowns has repeated across multiple market cycles.

If losses hurt twice as much, how do you plan around that instead of fighting it?

By deciding the response to a correction before the correction happens, not during it. Loss aversion operates on the emotional brain in the moment; it has far less power over a decision that was already made in advance and simply needs to be followed. Some practical structures that work with this bias instead of against it:

• Automate the SIP debit so continuing requires no monthly action, and stopping requires a deliberate, separate step

• Set a rule in advance for what a correction of a given size means for the SIP, before any correction is underway

• Separate the emergency fund from the SIP corpus, so a market dip does not create real cash-flow pressure on top of the psychological pressure

• Review the portfolio on a fixed calendar schedule rather than in response to headlines, so the reference point resets on a plan, not on fear

FAQ

Does stopping a SIP during a market fall lock in a loss? It does not realize a loss the way selling would, since units already purchased stay invested. But it does stop new units from being bought at the lower price, which is the specific benefit rupee cost averaging is designed to capture during a correction.

Is a higher loss-aversion coefficient always a bad thing for investors? Not inherently. The same instinct that pushes people to pause a SIP also makes them cautious about genuinely risky bets, which is useful in other contexts. The issue is applying that instinct to a systematic, long-horizon investment plan built specifically to be volatility-agnostic.

Should a SIP ever actually be stopped or reduced? Yes, when the reason is a change in personal cash flow, goals, or risk capacity, not a reaction to short-term NAV movement. A SIP amount tied to a goal and a horizon should generally be revisited on that basis, reviewed periodically, rather than paused in response to a single correction.

Does AMFI's SIP stoppage data prove investors are panicking? Not by itself. Some of the ratio's movement reflects mechanical factors like completed fixed-tenure SIPs or AMFI data cleanups. But the repeated pattern of stoppage ratios rising specifically during and after sharp corrections is consistent with loss-driven behavior rather than random churn.

The bottom line

A SIP is a mechanism for turning market volatility into an advantage, but only for the months an investor stays in it. Loss aversion pushes hardest to exit at precisely the point the mechanism is doing its most useful work. The practical fix is not more willpower in the moment a correction hits. It is a plan, set when markets are calm, that removes the monthly decision from the emotional part of the process altogether.

This article is for general investor education and does not constitute investment advice or a recommendation for any specific scheme. Mutual fund investments are subject to market risk, including the possibility of loss of principal. Past performance of any fund, index, or market is not indicative of future results. Read all scheme-related documents carefully. Vijay InvestEdge Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor, ARN-1777, and does not provide investment advisory services.