Negative or modest returns from a Systematic Investment Plan (SIP) during the first few years often leave investors wondering whether they have chosen the wrong mutual fund. Market volatility and temporary losses can make it tempting to stop investing or move to a fund that has recently delivered better returns.
However, investment experts caution against making decisions based solely on short-term performance. Equity mutual funds are designed for long-term wealth creation, and periods of underperformance are a normal part of market cycles.
According to investment experts, muted returns during the initial years of an SIP are common because the investment corpus is still relatively small, making overall returns more sensitive to short-term market movements.
Investors often go through phases of weak or even negative returns before the benefits of long-term compounding begin to emerge. The timing of when an SIP starts can also influence early performance. Those who begin investing just before a market correction are more likely to see disappointing returns initially, even if the fund remains fundamentally strong.
Market declines, however, allow each SIP instalment to buy more units at lower Net Asset Values (NAVs), which can significantly improve long-term returns once markets recover.
Experts recommend assessing an equity mutual fund over at least three to five years instead of focusing on one or two years of returns.
A complete market cycle provides a better indication of a fund's quality and its ability to perform across varying market conditions. Even well-managed funds may temporarily underperform their benchmark or peers during certain phases of the market.
The key is to determine whether the underperformance is cyclical and market-driven or the result of deeper structural issues within the fund.
Temporary underperformance alone is rarely a sufficient reason to stop an SIP or move to another fund.
Investors should instead review whether:
The fund has consistently underperformed its benchmark over several years.
It has lagged comparable funds in the same category for an extended period.
There has been a change in the fund manager.
The investment strategy or mandate has changed significantly.
The fund's risk profile no longer matches the investor's financial goals.
Persistent underperformance coupled with these structural changes may justify switching to another fund.
Before switching funds, investors should also take into account:
Exit load, if applicable.
Capital gains tax implications.
The impact on overall asset allocation.
Whether the new fund offers a stronger long-term investment approach rather than simply better recent returns.
Experts warn that discontinuing SIPs during market corrections can be counterproductive.
Continuing investments during falling markets enables investors to accumulate more units at lower prices, improving the potential for higher long-term returns when markets rebound. Likewise, frequently switching funds based on short-term rankings often results in investors chasing recent winners instead of following a disciplined investment strategy.
Long-term SIP investing rewards patience and consistency. Investors should review their mutual funds periodically, but decisions should be based on sustained underperformance, changes in fund management or investment strategy, and alignment with financial goals—not temporary market weakness or short-term fluctuations.
