What to do When Your Mutual Fund SIP Investments Underperform?

Learn why SIPs underperform and discover actionable steps to address them. Assess goals, use SIP calculators, diversify, and stay invested for success.

Systematic Investment Plans (SIPs) are a popular and convenient way to invest in schemes of a mutual fund. They make it easy to invest consistently and leverage different market conditions. However, there may be times when your SIPs don’t deliver the returns you were expecting. If your mutual fund SIP investments are underperforming, don’t panic. Instead, take a step back, assess the situation, and decide on a suitable course of action.

Here’s a simple guide to help you navigate SIP underperformance and get your investments back on track.

Why do SIPs underperform?

It’s important to understand why your SIP returns may not match your expectations.

1. Market volatility: SIPs are designed to handle market ups and downs, but during prolonged bear markets, returns may be below expectations. 
2. Short term investment horizon: SIPs work better over the long term. If you’re investing for less than 3-5 years, you may not get the kind of return potential than a longer horizon would deliver, especially if market conditions are unfavourable. 
3. Improper fund selection: Choosing funds that don’t align with your goals or risk profile can lead to underperformance.
4. Benchmark and peer comparison: A scheme of a mutual fund that consistently underperforms its benchmark or similar mutual fund schemes might not be a strong performer.

Understanding these factors will help you make informed decisions about your SIPs.

How to address underperformance in mutual fund SIP investments

Now that you understand the possible reasons for underperformance, let’s take a look at what you can do in such an event. 

1. Reassess your financial goals

Your financial goals are the foundation of your investment plan. If your SIPs are underperforming, the first step is to check if the mutual fund scheme still align with your goals.

For example, if your goal is long-term wealth creation, an equity mutual fund scheme may be appropriate, even if it’s facing short-term volatility. On the other hand, if you need the money in a few years, a less volatile debt or hybrid mutual fund scheme might be a suitable fit.

Ask yourself:

• Has your financial goal or timeline changed?
• Does the mutual fund scheme match your risk tolerance and investment objective?

If there’s a mismatch, consider reallocating your investments to mutual fund schemes that are more suitable.

2. Use SIP mutual fund calculator to re-evaluate your returns

A SIP mutual fund calculator is a helpful tool that can help you project the potential returns on your investment. It is useful to use the calculator before investing to set realistic expectations and identify a suitable investment amount or horizon that can potentially get you to your goals.

Even after you invest, you can use the calculator to see if your investment is performing along expected lines. If returns are falling short, consider the following:

• Check if the underperformance is due to temporary market conditions or persistent issues with the fund. For example, if you have invested in an equity mutual fund scheme and have a long investment horizon, the scheme’s performance over one year or two years may be below expectations because markets may have been volatile or falling in that duration. 
• Compare your scheme’s performance with its benchmark and similar schemes of mutual fund. If your fund’s performance is in line with that of the broader market, it may not be a reason for concern. 
• Use the calculator to adjust your investment amount or timeline to bridge the gap.

3. Evaluate fund performance and diversify

If your mutual fund SIP investment is not delivering, a closer look at the scheme’s performance is crucial. Here’s how you can evaluate it:

• Compare with benchmarks: Check if the mutual fund scheme has consistently underperformed its benchmark (e.g., NIFTY 50 or BSE SENSEX).
• Peer comparison: Look at schemes of other mutual funds in the same category to see if your scheme is lagging behind.
• Fund manager changes: Significant changes in the fund management team or strategy can impact performance.

Underperformance over short cycles may not be a cause for concern. For instance, the fund manager may have a more long-term strategy. However, if the fund is persistently underperforming for 2-3 years, it might be time to switch.

Additionally, diversification can help balance risks. If all your SIPs are in equity schemes of a mutual fund, consider adding debt or hybrid schemes of a mutual fund to your portfolio. This can cushion your returns during market downturns.

4. Extend your investment horizon

One of the biggest advantages of mutual fund investments is the power of compounding, which can grow stronger over time. If your corpus is not adequate, extending your investment horizon can make a difference. Compounding happens

Review your financial timeline and see if you can afford to stay invested longer to achieve your goals.

5. Step up your SIP investments

If your SIP returns are not meeting your expectations, increasing your SIP contribution can help you close the gap. This strategy, known as a step-up SIP, involves gradually increasing your investment amount as your income grows. 

For example, if you start with Rs. 5,000 per month, you can increase by 10% annually. You can set the frequency and rate of increase at the time of setting up your step-up SIP. 

When to switch funds or consult an advisor

Switching funds should not be your first reaction to underperformance. However, if your SIP investment in a mutual fund scheme consistently underperforms its benchmark and peers for more than two years, consider transferring to a better-performing fund.

Additionally, consulting a financial advisor can provide valuable insights. An advisor can help you:

• Identify the root cause of underperformance.
• Recommend schemes of a mutual fund that better suit your goals.
• Rebalance your portfolio to optimise return potential.

Stay patient and proactive

SIP investing is a long-term strategy, and short-term underperformance doesn’t mean you’ve made a mistake. By reassessing your goals, using tools like a SIP mutual fund calculator, and making informed adjustments, you can more effectively manage your investments. 

Remember, the key to SIP investing is patience, consistency, and adaptability. Keep reviewing your portfolio regularly, stay focused on your financial goals, and let time do the rest.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

(Disclaimer: Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)