An SIP is a method of investing a fixed amount in a mutual fund scheme at regular intervals. Because the underlying scheme is market-linked, the current value of investments made through an SIP can sometimes fall below the total amount invested.
Seeing negative returns can be uncomfortable, but a short-term decline does not automatically mean that the scheme is underperforming or unsuitable. Before making a change, it may help to understand what caused the decline, compare the scheme with its benchmark and same-category funds, and revisit the financial goal, investment horizon and risk tolerance.
What to do when your SIP turns negative
When an SIP investment shows negative returns, it is useful to separate two decisions: stopping future instalments and redeeming the units already held. These decisions have different consequences and may be assessed separately.
What to consider before stopping an SIP or redeeming the units
Stopping an SIP ends future instalments but does not sell the units already held. Redeeming involves selling some or all of those units. Before taking either step, investors may consider:
- Whether the decline is market-wide or specific to the scheme
- How the scheme has performed against its stated benchmark and same-category funds
- Whether the financial goal or investment horizon has changed
- Whether the scheme continues to match their risk tolerance
- Whether the money is required for an upcoming expense
- Any applicable exit load and potential tax implications
Redeeming when the investment value is below the amount invested can realise the loss. However, remaining invested does not assure that the loss will recover.
How to check whether the mutual fund in your SIP is underperforming
Investors may compare the scheme’s performance with its stated benchmark and funds in the same category over comparable periods. Comparing funds from different categories may not provide a meaningful picture because their objectives, portfolios and risk levels can differ.
Relevant points for comparison may include:
- Performance relative to the stated benchmark
- Performance relative to same-category funds
- Consistency across different market conditions
- The scheme’s Riskometer and level of volatility
- Changes in the fund manager, investment approach or portfolio
- Tracking error or tracking difference, where the SIP is in an index fund
A single period of weak performance may not establish persistent underperformance. Repeated and material underperformance across relevant periods may require closer review.
Past performance may or may not be sustained in future.
Review your diversification
Investors may review their complete portfolio rather than assessing one scheme in isolation. Diversification may reduce concentration in one company, sector or asset class, but it cannot prevent market-linked losses. Adding more funds does not automatically improve diversification. Different schemes may hold many of the same securities, resulting in portfolio overlap.
Revisit your risk tolerance and investment horizon
Investors may consider whether the scheme’s risk level continues to match their ability to tolerate fluctuations and the time remaining until the financial goal. A longer investment horizon provides more time for market conditions to change, but it does not guarantee that negative returns will recover. If the goal is approaching, fluctuations in the investment value may have a greater effect on the amount available for that goal.
Key reasons why your SIP might be losing money
An investment made through an SIP can show negative returns for several reasons:
- A broad market decline: Equity and bond markets can fall because of economic, political or market-related developments.
- Weakness in a category or sector: A scheme concentrated in a particular market segment may be affected when that segment declines.
- Scheme-specific performance: The scheme may perform below its stated benchmark or same-category funds because of its portfolio positioning or investment approach.
- Timing of recent instalments: Some instalments may have been invested shortly before or during a market decline, which can affect the overall SIP return.
- Interest-rate, credit or liquidity changes: These factors can affect debt mutual fund schemes.
- A mismatch in risk expectations: The scheme may fluctuate more than the investor originally expected.
An SIP spreads purchases across different dates, but it does not remove the risks of the underlying mutual fund or prevent negative returns.
Understanding SIP consistency and redemption timing
Investing regularly can make it easier to follow a planned contribution schedule. When the scheme’s NAV is lower, the same instalment purchases more units; when the NAV is higher, it purchases fewer units. This is known as rupee-cost averaging.
Rupee-cost averaging affects the average purchase cost, but it does not eliminate market risk or assure potential returns.
When evaluating whether to continue, pause or stop an SIP, relevant considerations may include the scheme’s suitability, the financial goal, investment horizon, cash flow and risk tolerance. A decision based only on a short-term market movement may not take all these factors into account.
For redemption decisions, investors may also consider the financial goal, liquidity requirements, applicable exit load and potential tax implications.
How often should you review your SIP portfolio?
There is no single review frequency suitable for every investor. An annual review may be a practical starting point, with an earlier review when there is a material change in the investor’s finances, goals or the mutual fund scheme.
A portfolio review may include:
- Whether the goal amount or target date has changed
- Whether the SIP instalment remains affordable
- Whether the scheme continues to match the investor’s risk tolerance and investment horizon
- How the scheme has performed against its stated benchmark and same-category funds
- Whether the portfolio has become concentrated or contains overlapping schemes
- Whether there has been a material change in the scheme’s objective, portfolio or fund management
Should you review your financial goals when SIP returns turn negative?
A negative return alone does not necessarily require an investor to change a financial goal. However, the goal may be reviewed if its target amount, due date or importance has changed, or if the investor’s income, expenses, liabilities or risk tolerance are different.
If the goal is approaching, investors may assess the gap between the amount currently available and the amount required. This can provide more useful context than looking only at whether the SIP return is positive or negative.
An SIP calculator can help investors compare different contribution amounts, tenures and assumed potential return scenarios.
The calculator is an aid, not a prediction tool. It may provide only an indicative picture.
Conclusion
Negative SIP returns may prompt a review, but they are not, by themselves, a signal to stop the SIP, redeem the units or invest more. Relevant considerations may include the performance of the underlying scheme, its benchmark and category, the financial goal, investment horizon, risk tolerance and overall portfolio.
An SIP spreads purchases across different dates, often at different NAVs. However, this investment method neither assures a positive investment outcome nor prevents losses.
FAQs
What should I do if my SIP turns negative?
Investors may begin by understanding whether the negative return is linked to a broad market decline, weakness in the fund category or scheme-specific performance. The scheme may then be compared with its stated benchmark and same-category funds. The financial goal, investment horizon and risk tolerance may also be reviewed before stopping future instalments or redeeming existing units.
Is it normal for SIPs to show losses initially?
An investment made through an SIP can show negative returns, particularly during a market decline or when the investment period has been short. This does not automatically establish that the scheme is unsuitable, but its performance and risk may still be reviewed in the relevant context.
Do SIPs give guaranteed returns?
No. An SIP is only a method of investing regularly in a mutual fund scheme. Any potential return from the underlying scheme depends on the performance of its investments and is not guaranteed.
Is it a good idea to stop my SIP if returns are negative?
There is no single answer suitable for every investor. A short-term negative return alone may not provide enough information to make this decision. Relevant factors may include the scheme’s performance relative to its benchmark and same-category funds, the financial goal, remaining investment horizon, risk tolerance and cash flow. Stopping future instalments and redeeming existing units are separate decisions.
How long can SIP returns remain negative?
There is no fixed period. Returns may remain negative for days, months or longer, depending on market conditions, the fund category, the scheme’s portfolio and when the instalments were invested. Negative returns have the potential to reduce or turn positive if the scheme’s NAV rises sufficiently relative to the purchase costs. However, this outcome and its timing are not assured.
Should I increase my SIP when markets fall?
A market fall alone may not provide enough information to decide whether an SIP amount should be increased. Before considering an increase, investors may review whether the additional contribution is affordable, emergency requirements are covered, the scheme remains aligned with the financial goal and the additional market exposure matches their risk tolerance. Purchasing more units at a lower NAV does not guarantee potential gains or recovery.
