Is one year long enough to evaluate the performance of your SIP investment?

Following a Systematic Investment Plan or SIP to invest in mutual funds can help you withstand the market’s inherent volatility. Mutual funds may provide relative stability against market fluctuations by offering portfolio diversification options and letting experienced fund managers take the lead on decision-making.
This article explains why it is not advisable to stop your SIPs in a mutual fund based on just a single year’s returns.

• Table of contents:

1. Opt for long term SIP - The slow and steady approach
2. The longevity advantage
3. Other assessment parameters

Opt for long term SIP - The slow and steady approach

Investments in mutual funds usually start bearing results over longer periods. Financial experts typically suggest an SIP investment horizon of at least three years for a debt mutual fund (which invests in fixed-income securities such as bonds and debentures) and more than five years for equity funds, which invest mainly in stocks and shares. This is because the financial market is prone to frequent ups and downs and sensitive to even minor economic and geo-political shifts. A particularly turbulent year may see a big fall in market performance, but the next year may see a steep rise. Over a longer period of seven to 10 years, stability is usually restored in a market even after extreme ups or downs. For instance, in the last three years alone, the global stock market saw a crash owing to the Covid-19 pandemic and then an eventual resurgence. Therefore, your SIP 1-year returns, whether high or low, may not be a reliable indicator of how your portfolio is likely to perform in the long run.

You can also use an SIP mutual fund calculator to get a better understand of how your investments may grow over time. Based on your SIP amount, tenure and expected returns, the calculator can help you get an idea of how much you can potentially earn on your investments. If your investment horizon is a few years or more, one year of underperformance may not have a significant impact on your final returns, and an SIP calculator can help you see the bigger picture.

The longevity advantage

One of the reasons why advisors recommend using SIPs to invest is that they have the potential to build wealth over a long period by saving in small but regular instalments. Longevity is an important part of such an investment strategy.
SIPs not only help create a disciplined savings habit but also have the potential for growth through the power of compounding. When you use an SIP to invest in a mutual fund, the gains accrued over a cycle are put back into the fund. In the long term, this can have a sizeable multiplier effect. You may lose out on this potential when you rely on your SIP’s one-year returns to stop your investment.
Another reason SIPs are beneficial is because of rupee cost averaging. The money you invest in a mutual fund goes into purchasing a certain number of units. When the market is down, the per-unit cost decreases and when the market is up, it increases. When you invest via SIPs, you can leverage these market fluctuations because you end up buying more units when the market is down, and less when it is up. In the long term, this could reduce the average amount you spend per unit. Moreover, by staying invested through dips in the market while also accumulating more units at lower prices, you can potentially reap benefits when the market resurges.

Other assessment parameters

Instead of one-year returns, there are a few other parameters you can look at to evaluate if your mutual fund’s performance is a cause for concern.
For instance, if your mutual fund is underperforming for a duration of two years or more, you may want to consult a financial advisor to evaluate your investment plan. You may also want to take notice if the fund’s performance is consistently lower than its benchmark (an index that is identified as a standard against which to assess a fund’s performance).
You can also check your mutual fund’s historical performance to see how consistent its returns have been over longer durations and whether it has managed to stabilise after periods of decline. Historical data does not predict future performance, but it could help you make an informed decision. You may also want to re-assess your investment if there is a fundamental shift in the mutual fund scheme, such as a change in the risk profile or an overhaul in asset allocation, which is not in line with your financial goals.

Conclusion

A one-year horizon is too short to assess the performance of your mutual fund, especially when the market is doing unusually well or poorly. Stopping your SIPs based on this small data set could affect your long-term investment goals. It is recommended that you consult a financial advisor before making major revisions to your investment strategy.

FAQs:

Is one year sufficient to assess SIP performance?

Evaluating SIPs in a year can provide a snapshot, but market fluctuations may not reflect long-term trends. Longer periods offer better insights.

What is an ideal timeframe to judge SIP performance?

A single year's performance might be misleading due to market volatility. A more comprehensive view over multiple years provides a clearer picture. To truly understand performance, consider a more extended period like 3-5 years.

Why isn't one year enough to evaluate SIP effectiveness?

Short-term variations can overshadow overall performance. Examining your SIP investment over several years reveals consistent trends and patterns.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.