When your SIP returns turn negative

If you had started investments in equity SIPs in the past 3 months or 6 months or in some cases even one year, your annualized returns (IRR) would likely be negative with most equity funds. Mid and small-cap funds would seem the worst hit.  We are receiving a variety of queries about this: some complaining that they were given bad funds, some saying they want to stop SIPs and others dubbing mutual funds as useless products and that they would have been better with their FDs.

For all those worried about their SIPs here are 3 simple points to remember: First, when the markets fall, how can equity funds not fall? Whether you invest through SIPs or lumpsum equity markets will be volatile in the short term and so will your funds. The difference you make to your portfolio by investing through SIPs is that you make the best of such volatility by investing in dips. For example, take a large-cap fund like Aditya Birla Sun Life Frontline Equity. If you were doing a SIP of say Rs 20,000 a month in this fund, the units allotted to you end April would be 90 units at NAV of Rs 220. The same SIP by June end would have fetched 95 units because NAV had dropped to Rs 211. One way of looking at it is that your fund has fallen; which it will, in any short-term volatility. The other way of looking at it is that your investment is effectively being averaged. You do not do such averaging in lumpsum. Hence, your average cost goes down and your returns get better over the long term.

Second, what you see the 3-month or 6-month IRR returns of your SIP, it always given you a larger picture than what actually is, whether it is profit or loss. For example: the Nifty 500 TRI index fell about 1.56% (point to point) between January end and June end of 2018. The SIP IRR for this was -7.3%! This is because it considers time value of moneyand also annualizes it. While it makes immense sense over periods more than 1 year, in the short term, the returns or losses seem amplified. In other words, your losses are not as large as they seem. Simply look at the invested amount versus current value for periods less than a year.

Third, when the averaging of the kind we spoke in the first point happens, the worst thing one can do to their investment is to stop such SIP. In the first example, if you had stopped SIPs at your last instalment NAV of Rs 220, you would have deprived cost averaging to your portfolio. The returns are not going to look good unless averaged.

Volatile markets are ripe opportunities for your SIPs to do their job. Avoid checking returns especially short term and avoid acting on such gyrations. Please remember, even if you held expensive policies like ULIPs, the same volatility happens. Just that you have no means of checking often. Ignorance pays, sometimes!