When SIP Does Not Work --- Do This!

Aug 01, 2020

All mutual fund investments are subject to market risk, but with a Systematic Investment Plan (SIP), your wealth creation journey is, usually, smoother.

There is no doubt that SIP itself is an innovative way to start investing regularly. Systematic Investment Plans (SIPs), facilitates diligent mode of investing in mutual funds. This tactic takes advantage ofits rupee-cost averaging feature and the power of compounding, which helps to accumulate wealth for a long-term investment horizon.

When you invest in a mutual fund your money is deployed in a either equity schemes and/ or debt schemes. By opting for the SIP, when the market goes up, you buy lesser mutual fund units. If the market dips, you can pick up a higher number of units.


Image by Steve Buissinne from Pixabay

Thus, you are able to lower the downside risk by averaging out your cost, mitigate the shocks of short-term volatility in equity, and systematically build a corpus to accomplish your long term financial goals, such as retirement.

SIPs are an ever-evolving, convenient investment option that instils financial discipline.

Have you considered that there may be instances when SIPs might not work?

Well here's the thing, SIPs do not work in bad times for short tenure!

If you see SIP returns of some worthy funds was negative as compared to lumpsum investment as shown below in Table 1. This points out that the SIPs do not work well in the market down turn. But SIP was designed to average out the cost of purchase through systematic and regular buying of units in a mutual fund.

The fundamental idea is to 'not time the market'.

Table 1: Worst performing SIPs

Scheme Name SIP Investment Returns (% XIRR) Lumpsum Investment Returns (% CAGR)
5 years 3 years 1 year 5 years 3 years 1 year
Aditya Birla SL Small Cap Fund -6.09 -14.76 -7.11 1.53 -11.21 -13.41
Sundaram Small Cap Fund -5.53 -11.48 -1.96 -1.25 -11.24 -3.24
Franklin India Smaller Cos Fund -4.60 -12.54 -9.01 2.09 -8.13 -12.63
HSBC Small Cap Equity Fund -3.87 -10.26 1.11 0.27 -8.27 -5.37
Nippon India Multi Cap Fund -2.83 -10.43 -16.48 0.53 -3.94 -16.92
Sundaram Mid Cap Fund -1.99 -8.72 -7.20 2.53 -5.81 -5.42
Aditya Birla SL Midcap Fund -1.89 -8.10 -1.53 2.23 -6.33 -5.81
L&T Emerging Businesses Fund -1.59 -12.35 -8.62 5.53 -7.29 -11.42
Franklin India Equity Advantage Fund -1.28 -6.89 -5.51 1.70 -3.38 -9.59
Data as on July 31, 2020
(Source: ACE: MF; PersonalFN Research)

As it is observed that during prolonged bull phases, rupee-cost averagingis negated and it buys at higher prices too. Historically the average SIP returns of Bull and Bear phase over long-term horizon has been better and during Bull phase it has outperformed the S&P BSE 500 Index as seen in Table 2.

The reverse is true during prolonged bear phases when one accumulates more units as the market value tends to be lower than the cost amount invested.

Table 2: SIP returns across market cycles

Market cycles Bear Phase Bull Phase Bear Phase Bull Phase Bear Phase Bull Phase Corrective Phase
08-Jan-2008 To 09-Mar-2009 09-Mar-2009 To 05-Nov-2010 05-Nov-2010 To 20-Dec-2011 20-Dec-2011 To 03-Mar-2015 03-Mar-2015 To 25-Feb-2016 25-Feb-2016 To 23-Jan-2018 23-Jan-2018 To 30-Jul-2020
Average SIP Returns Of market cap funds -53.609 49.917 -27.794 36.765 -25.318 28.591 -1.208
S&P BSE 500 Index (rolling returns) -0.368 0.218 -0.135 0.090 0.114 -0.091 -0.001
Data as on July 31, 2020
(Source: ACE: MF; PersonalFN Research)

Recently even a research study by DSP Mutual Fund's findings published on Cafemutual pointed out that the chances of earning negative returns decreases with every passing year and the chances of negative returns is nil after 15 years.

So, if you are weighing the pros and cons of pausing/stopping your SIP when the economy is under going financial stress and markets are extremely turbulent.... Remember during market upswings it provides better returns as seen below in Table 3. SIP returns have been better than lumpsum investments for same time periods.

Table 3: Top performing SIPs

Scheme Name SIP Investment Returns(% XIRR) Lumpsum Investment Returns (% CAGR)
5 years 3 years 1 year 5 years 3 years 1 year
Parag Parikh Long Term Equity Fund 13.43 13.30 31.13 12.05 11.89 18.65
Axis Bluechip Fund 11.32 8.14 6.54 10.21 10.32 6.18
Canara Rob Bluechip Equity Fund 10.77 8.98 14.96 9.35 8.61 11.55
Mirae Asset Emerging Bluechip 10.74 6.05 12.37 12.60 5.93 8.56
Axis Midcap Fund 10.68 7.81 9.78 8.50 9.81 13.87
PGIM India Diversified Equity Fund 10.49 10.33 31.91 8.50 6.52 17.90
Quant Active Fund 10.18 9.06 30.80 9.60 8.33 16.30
Canara Rob Equity Diver Fund 9.37 6.67 12.81 7.72 7.07 8.93
Data as on July 31, 2020
(Source: ACE: MF; PersonalFN Research)

Thus, one should consider investing in equities via SIP for an investment horizon of more than 5 years.

End notes

SIP is a method of investing regularly in mutual funds. To support this investment method, you need to pick the right mutual funds to achieve your financial goals. So consider the qualitative and quantitative parameters when selecting the mutual fund suitable for you.

Investing in Mutual Funds through SIPs is a wonderful option that besides growing wealth also helps in developing patience, focus, and discipline, i.e. good habits.

Before investing in any mutual fund, assess your financial goal, risk ability, investment time horizon, and your financial circumstances. Keep your eye on the long-term objective; the longer your investment horizon, the higher your scope to build wealth from different market phases.

Avoid letting your emotions influence your financial decisions, especially in crunch times over the short term. It's up to you to make prudent investment decisions and gain the most from your investments. Remember, every rupee invested, another rupee earned.

PS: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. We have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Click here to get access to the report.

Warm Regards,
Aditi Murkute
Senior Writer

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