SIP Returns: Mutual fund investors who have been investing through systematic investment plans (SIPs) over the past two years may be disappointed with their returns as equity markets have remained largely flat. However, financial experts say short-term performance should not be the sole reason to stop investing, switch funds or change an investment strategy.
Hemant Rustagi, CEO of Wiseinvest and mutual fund expert Vishwajeet Parashar, in a conversation on Zee Business, said investors should focus on their financial goals, asset allocation and investment horizon rather than reacting to short-term market movements.
They also explained how market corrections can help SIP investors accumulate more mutual fund units through rupee-cost averaging.
SIP Returns: Why have investors seen low returns over the past two years?
Rustagi said investors need to understand the purpose of an SIP before evaluating its performance. According to him, SIPs help investors develop financial discipline by encouraging them to save and invest before spending.
He explained that equity markets are inherently volatile and can also remain flat for extended periods. As a result, SIP returns may not always meet investors’ expectations over shorter periods.
Rustagi said that investors who have been investing through SIPs for two years have an average holding period of roughly one year, making it too early to judge the long-term performance of their investments.
He cited average returns of around 2.5-3 per cent for large-cap funds and 4-5 per cent for flexi-cap funds. In comparison, he said mid-cap funds had delivered around 9 per cent, small-cap funds around 10 per cent and multicap funds around 7-8 per cent.
Rustagi said performance varies depending on the investor’s portfolio allocation and that not all categories of mutual funds have remained flat.
He added that periods of market weakness can allow investors to accumulate more units at lower prices, potentially benefiting them when markets recover.
Should investors stop SIPs after two years of low returns?
Both experts advised investors against stopping SIPs merely because of weak short-term performance.
Parashar said SIPs work over the long term by allowing investors to purchase more units when markets decline. This helps average the cost of investments over time.
He cited historical market downturns to explain why investors should maintain a long-term perspective.
According to Parashar, investors who started SIPs before the dot-com crash in 2000 may have experienced a period of around three years without meaningful returns. However, he cited a five-year annualised return of around 23 per cent and a seven-year annualised return of around 34 per cent in the example.
He also referred to the 2008 global financial crisis, saying investors may have seen little or no returns for around two years, while the three-year annualised return in the example was around 23 per cent.
Parashar also pointed to the COVID-19 market downturn, saying investors who remained invested through the subsequent recovery benefited from the market’s rebound.
He stressed that investors should evaluate SIPs over a longer period rather than making decisions based on the previous two years alone.
Should you increase your SIP when markets are flat?
Rustagi said investors can consider increasing their SIP contributions if they have sufficient income, a longer investment horizon and the financial capacity to commit more money.
He explained that investing during market declines can help investors accumulate more units for the same investment amount.
However, he cautioned against increasing SIP contributions solely to take advantage of a short-term market opportunity.
“Just because the market is down, investing only to take advantage of that opportunity is not a strategy for equity investing,” Rustagi said, explaining that equity investments require a long-term commitment.
He added that investors with surplus funds earmarked for long-term goals could consider deploying a lump sum in a staggered manner.
Rustagi also said investors whose incomes have increased and who can genuinely afford higher contributions may consider increasing their SIP amounts.
SIP Returns: Why does the investment horizon matter?
Parashar said the investment horizon is a key factor in wealth creation because it allows investors to benefit from compounding.
He illustrated the impact of a longer investment period with an example of a Rs 10,000 monthly SIP. Assuming a 12 per cent annualised return, he said the investment could grow to around Rs 1 crore over 20 years.
He also explained the potential impact of a 10 per cent annual step-up in the SIP contribution, saying it could help investors build a larger corpus over time.
Parashar advised investors to link their SIPs to specific financial goals, review their funds periodically and avoid checking market movements every day.
He said investors should focus on staying invested for the period required to achieve their goals rather than reacting to short-term market cycles.
When should investors switch underperforming mutual funds?
Rustagi said investors should distinguish between their commitment to an asset class and their choice of individual mutual funds.
He explained that investors may continue investing in equity to pursue long-term goals, but individual funds need to be monitored and reviewed periodically.
According to Rustagi, investors should assess whether a fund is consistently underperforming its benchmark and peer group before deciding to switch.
He said that if a fund is underperforming and the investor has a sufficiently long investment horizon, it may be appropriate to consider moving both future SIP contributions and the existing investment corpus to a more suitable fund.
However, investors should account for the capital gains tax implications of redeeming existing investments.
Rustagi also highlighted the importance of reviewing asset allocation. Simply redirecting future SIP contributions may not be enough to correct an allocation that has become unsuitable for an investor’s goals.
What should SIP investors do now?
The experts’ advice was to focus on long-term goals, review portfolio allocation and avoid making hasty decisions based on two years of low returns.
Investors may continue their SIPs if their funds, asset allocation and financial goals remain appropriate. Those with sufficient financial capacity and a long investment horizon may also consider increasing contributions.
However, any decision to switch funds or increase investments should be based on individual circumstances rather than short-term market movements.