SIPs in the red: Should you stop, stay invested or invest more?

Systematic Investment Plans (SIPs) are meant to help investors ride out market volatility, but the prolonged weakness in equities has pushed returns into the red. A look at how investors approach SIPs should.

WHY HAVE SIP INVESTMENTS IN EQUITY MUTUAL FUNDS BEEN STRUGGLING DESPITE REGULAR INVESTMENTS?

SIP helps investors buy at different market levels, but it does not protect them from a fall in equity markets. The Nifty is down roughly 13% from September-end 2024. If several earlier SIP instalments were invested when stock prices and valuations were higher, a subsequent correction can pull the value of the accumulated units below the total amount invested, resulting in low or even negative returns. New SIPs invested during the correction buy more units at lower prices, but the benefit of these purchases may take time to show up in overall returns, particularly if markets remain weak or range-bound for an extended period.

Read more: Why junk bonds deliver equity-like returns but with far inferior volatility, explains Saurabh Mukherjea

WHEN MARKETS ARE FALLING, WHAT SHOULD YOUR SIP STRATEGY BE? SHOULD I STOP OR CONTINUE MY SIP WHEN RETURNS ARE NEGATIVE?

Investors with long-term goals should not stop an SIP merely because markets have fallen or recent returns have turned negative. In fact, a falling NAV allows every subsequent SIP instalment to purchase more units. If markets eventually recover, these units bought at lower prices can help bring down the investor’s average purchase cost.

However, continuing a SIP and increasing a SIP are two different decisions. Investors should not necessarily increase their SIPs simply because markets have fallen. Increasing the investment may make sense if they have additional savings, need to step up investments to meet a financial goal, or if a market decline has pushed their equity allocation below their desired asset allocation. The ability to withstand a further fall in equities or longer periods of low or no returns also needs to be considered.

HOW MUCH OF A CAUSE FOR WORRY IS IT IF SIP RETURNS ARE NEGATIVE?

Negative SIP returns over shorter periods need not by themselves be a reason to stop investing. Equity markets can go through periods of correction or weak returns, and SIP instalments invested closer to market peaks can remain in the red until markets recover.

However, investors should not assume that every poorly performing SIP will automatically recover simply because they continue investing. They need to distinguish between weak returns caused by a broader market correction and underperformance specific to the fund. Investors should regularly assess the scheme’s performance against its benchmark and peers over comparable periods.

Read more: How a 9-year-old Warren Buffett learnt a lesson on compounding by rolling snowballs on the lawn of his Nebraska home

IS SIP USEFUL ONLY FOR EQUITY SCHEMES?

No. SIP is simply a method of investing a fixed amount at regular intervals and can be used across different categories of mutual funds. While SIPs are commonly associated with equity funds because investors use them to gradually build long-term equity exposure and deal with market volatility, they can also be used to invest regularly in hybrid. The relevance of rupee-cost averaging, however, can differ across asset classes. It tends to be more visible in volatile assets such as equities, where NAVs can fluctuate significantly and the same SIP amount can buy substantially different numbers of units at different market levels.