Can There Be A Loss In Systematic Investment Plan (SIP)?

Kritika Nair was a distraught young lady. Her mutual fund advisor had asked her to start a systematic investment plan (SIP) on an equity fund 3 years back towards her retirement. When she reviewed the value of her SIP portfolio, she was shocked! The value of the portfolio was actually down by 5%. Her advisor had assured her that these equity fund SIPs would generate around 14% annually over a longer period of time. Kritika?s contention was that if the returns were (-5%) after 3 years, then what was the guarantee that the fund would actually perform at the end of 20 years. While Kritika has a point, the need of the hour is to get to the bottom of the story. What are the possible reasons for her mutual fund SIP delivering negative returns?

Broadly, there are four possible reasons why the SIP could be outperforming. Remember, 3 years is still a very short time to evaluate returns on equities. But the moral of the story is to get to the bottom of the negative returns. Typically negative returns can happen either due to bad markets or bad decisions. Here are four such conditions when your SIP on equity fund could give negative returns.

The Nifty And The Sensex Have Tanked Amidst Volatility

These are the kinds of events that we saw in 2000, 2008, 2010 and 2013. Had you started your SIP during these times then you must be sitting on negative returns for quite a few years. During the previous bull market, a lot of equity fund SIPs started around 2006. They kept accumulating SIPs at higher NAVs and then when the fall came in 2008, most investors had to sit on losses for another 3-4 years. This is a market-driven factor and you do not have must control over it. If your fund selection is right and you maintain your discipline, then your SIP should get back into positive returns.

You Have Got Your SIP Timing Wrong

It is quite normal to try and time the SIP. There are many investors who start their SIP around market peaks. When the market starts correcting, they take a decision to stop their SIP contributions and wait till the market bottom is made. That is a cardinal mistake because when the market is falling, that is when you keep accumulating SIPs at lower levels. Effectively, your average cost comes down and therefore you are in a position to make profits once the market recovers. But if you stop the SIP, then you are left holding on to your SIP at higher prices. Even if you start at the bottom, it is going to be a long time for you to better your average cost.?

You Made A Wrong Fund Choice

Not all equity funds and debt funds perform at par. Some equity funds or debt funds may underperform because they faced redemption pressure. Some debt funds could face pressure because they were exposed to ?AA? rated debt and the company defaulted. Equity funds also underperform when they make the wrong?portfolio choices. For example, fund managers who bought PSU banks in 2013 or capital goods manufacturers in 2011 would have seen their fund values erode substantially. Here, you as an investor, always have the choice of switching out of the fund. That is where an interim review comes in handy as you can make an alternate action plan and initiate action.

You Opted For A Thematic Fund Over An Equity Diversified Fund

One of the basic rules we ask SIP investor to follow is to focus their SIP on equity diversified funds. You can also do SIPs on sector funds and thematic funds. Imagine if you had done a SIP on an Information Technology Fund in 2000 or an Infrastructure Fund in 2008. You would have to wait a long time break even, leave alone making profits on them. Sector funds have a huge concentration risk. This also applies to themes like commodities, mid caps, small caps etc. When the tide turns, it takes a long time to recover.

Kritika realized that she had opted for a PSU banking fund 3 years back since she was very positive about that sector. She realized that it was time to shift back to the basics and opt for a more diversified theme.