Negative returns on SIPs shouldn't worry retail investors in India

When Sonam Thakral, 25, a Noida-based human resource professional looked up the return from her systematic investment plan (SIP) in an equity fund, which she had started last year, she was dismayed to find that it had turned negative. Like Thakral, retail investors across the country, especially those who entered the markets in the past year through the SIP route, are a worried lot today as their statements turn red. After all, fund managers have been touting this as the best way to invest in the stock markets for a long time. Currently, over 20 million SIPs bring in Rs 66 billion every month into the mutual fund industry through SIPs. 

Market sentiment has turned weak due to a variety of global issues, like the US’s threat to start a trade war and its central bank hinting at three more rate hikes this year. In addition, there are domestic headwinds as well. “Sentiment has been affected by the imposition of long-term capital gains tax and dividend distribution tax on equities and the Punjab National Bank scam,” says S Krishna Kumar, chief investment officer-equity, Sundaram Mutual. 
The volatility may also not end anytime soon. “The next 15 months are likely to be volatile. Political uncertainty, deteriorating macros from fiscal deficit to current account deficit, trade wars, etc are going to keep the markets volatile. A good monsoon and improving earnings could protect the downside,” says Nilesh Shah, managing director, Kotak Asset Management Company. After the sharp fall of almost 10 per cent in the past few months, returns from almost one-third equity schemes in which investors put their money in the past year have fallen by 0.18–16 per cent. 

Benefit from falling markets: Before you decide to discontinue your SIP or book accumulated profits, consider this: if you have stayed invested for three to five years or more, you are probably sitting on handsome profits. So, there is little reason to quit equities now. And if you started investing only in the past year, a falling market is, perhaps, the best thing that could happen to you. Instead of buying mutual fund units at higher net asset values (NAVs), you will now be able to get more units for the same investment amount. For example: If you invest Rs 10,000 a month in a fund with an NAV of Rs 200, you will get 50 units each month. If the NAV falls to Rs 175 next month, you will get 57.14 units. If the NAV increases to 250 in the month after, these additional 7.14 units will earn you Rs 535.5. Of course, the markets may take more than a month or two to recover. But whenever they do, you will get the benefit of having additional units in your kitty.   

Don't stop your SIPs now: Experts are unanimous in recommending that young investors should continue their SIPs and not pull money out of the markets. Says Shah: “The whole purpose of SIP is to invest through the ups and downs of the market. When market valuations have become cheaper due to the correction, it will not be wise to stop your SIP.” He adds that  in the past, too, there were periods when SIP returns were negative for an extended period — in 2008-09 and in 2012-13. “People who got deterred due to low to negative return and stopped their SIP lost when the market upturn came. Those who invested through the cycle benefited,” says Shah. 

This event also underlines the risks of investing at high valuations. In March last year, the Nifty was already trading at a price-to-earnings (PE) ratio of around 23. The Nifty Midcap 50 (33-49) and the Nifty Small Cap 50 (45-56) were trading at even higher valuations. “If you enter the markets at high valuations, there is a high possibility that you could earn muted returns in the near future,” says Deepesh Raghaw, founder,, a Sebi-registered investment advisor (RIA). The table given alongside also illustrates the same point. However, if you continue your SIPs, you are likely to earn decent returns in the longer run. When investing in equities, you must have a horizon of 7-10 years. “Even if you invested at a peak, it is quite possible that in 7-10 years we could be at another peak, whose level would be higher than that of the previous one,” says Raghaw. 

Some course correction required: Mid- and small-cap funds outperformed large-cap funds in the recent bull run. Typically, these funds tend to rise faster in a rising market and fall harder when markets decline. If you invested a higher portion of your portfolio in mid- and small-cap funds, you need to change that. You should ideally have 70-75 per cent of your equity portfolio in large-cap funds, which tend to be more stable, and 25-30 per cent in mid- and small-cap funds.

Many young investors have also put all their money in equities. As the amount they invest grows, they should diversify into fixed income and gold also. A diversified portfolio tends to be less volatile than a pure-equity portfolio. “Check every six months to ensure that your fund doesn't underperform its category average and benchmark,” says financial planner Arnav Pandya. 



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