Do not panic if SIP return is in the red, give it time to recover

Returns from systematic investment plans (SIPs) are not supposed to turn negative. But they have currently. Average SIP returns of diversified equity funds across market caps and investment horizons (up to five years) are in the red. SIP returns are also looking poorer at present than trailing returns (see table).

The swift fall in the markets is behind both the phenomena. “SIPs work well when the markets witness a downturn and then rally. With each instalment you are able to purchase units at lower levels. This pays off when the markets move to a higher level. When the opposite happens — you have been purchasing at similar or higher levels and there is a sharp fall — then SIP returns could turn negative and also lag behind point-to-point returns,” says Vidya Bala, co-founder, PrimeInvestor. In case of a lump sum investment, there is no averaging of purchases at higher levels, and hence the return is slightly better. Instances of SIP returns turning negative have occurred in the past also, but they are rare.

Many investors may experience disappointment at not earning a positive return from equity funds despite holding them for five years. “It is to guard against this risk that investors are advised to have some allocation to debt even in longer-term portfolios,” says Bala.

Large-cap funds have fallen more sharply over the past year than mid- and small-cap funds. Normally, investors associate higher stability and resilience with the large-cap category. “Large-caps had rallied more in 2019. Mid- and small-caps have hardly performed since the start of 2018. They had only started catching up from November 2019. Since large-caps had risen more, their fall has also been sharper,” says Ankur Kapur, founder and managing partner, Plutus Capital.

Source: mutualfundindia.com

One lesson from the sharp correction is that any money that you need in the short-term should be pulled out of equities. “Follow a glide path and start reducing equity allocation as your goal approaches. Money required for that goal should be fully invested in fixed-income instruments at least two-three years in advance,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor.

Do not be led by the current numbers into stopping your SIPs. As explained earlier, it is only now that each instalment of your SIP will start purchasing units at lower prices, and this will enhance your returns when the markets rebound. And they always do. Bear in mind that the 52 per cent decline of the Sensex in 2008 was followed by an 81 per cent rebound in 2009.

If a fund you have invested in has declined much more than the category average, do not dump it in haste. Some funds decline less because they move into cash. This looks good so long as the markets are falling but can backfire if the markets rebound sharply. If the fund you hold has a good long-term track record, then give your manager time to recover. Some funds tend to fall harder in a downturn but compensate by rising equally swiftly when the markets recover. But if the fund has been a laggard for, say, six quarters, then you may jettison it and move to a more consistent performer.