Underperforming SIPs - A loss or an Opportunity?

Did you start your SIP in Equity mutual funds last year itself? Are you worried because you are seeing your portfolio in negative for the last few months? Do you want to stop your SIP because you are afraid you will lose all your money?

If your answer is yes to all these questions, then continue reading. We are planning to help you deal with this problem.

Around 4-5 years back, India was a very attractive market in terms of valuation and fundamentals for domestic as well as foreign institutional investors. Hence, investment in Indian markets was increasing every year which took the Indian markets to new highs every year. Equity Mutual Funds were a good way to be part of this growth story. After AMFI’s campaign of “Mutual Funds Sahi Hai”, many new retail investors started taking participation in equity market via mutual funds. Demonetization also moved the retail money to mutual funds because at the time it seemed to be a better alternative.

Markets were at the peak in August 2018, after August the markets started correcting. Many investors who started their SIPs one or two years back are now watching their portfolio go down every day. One important logic to understand the reason behind this is, the entry points for the SIPs have been increasing every month because markets were continuously going up.  NAVs of mutual funds started going down, and the portfolio’s value also got affected because of the same. With the same logic, now that markets have become volatile, SIPs will be more profitable because of lower entry points.

But, how worried should you be?

Equity markets are embedded with inherent volatility. In shorter horizons, the markets tend to give negative returns. But if these shorter horizons are combined, the returns improve as time horizon increases. Let us illustrate this with an actual example. We have taken four major equity categories viz. Large Cap, Multi Cap, Mid Cap, and Small Cap. In these categories, we have taken 3 funds with the highest AUM and history of at least 5 years.

A simple message from above data is that there is a possibility of negative returns from SIP over 1 year but if you continue the SIP for long term, the returns improve with time.

Here’s the checklist which can be used if you get thought of stopping your SIPs in volatile markets:

Do a quarterly, half-yearly or annual review of your mutual fund portfolio. Daily tracking of your mutual fund investments is not advisable.

1. A portfolio review is a process to check if your investments are on track and if your portfolio performance is in alignment with the market. It does not imply that every time you do a review, you need to sell something and buy something.

2. An important analysis factor is to check if your mutual funds are beating the benchmark performance over the long term. If it is, then you don’t have to get worried over small under-performance in the short term.

3. The returns get normalized as the portfolio settles for a period of 3 years or more. Hence, make a point to stay invested for longer horizons.

4. Do not just select a mutual fund for your investment based on past returns. Define your goals; understand your risk profile and investment horizon. Once these factors are clear, choose a fund which will suit your requirements.

5. In the end, if your goals are more than 8 years away, have patience and let your SIPs work for you.