The year 2019 was a roller coaster ride for mutual fund investments. There were times when the returns from these investments were at an all time high, and we also witnessed extreme losses due to the movements in the market. For instance, IIFL Focused Equity Fund delivered more than 25% annualised returns in the past 1 year while HDFC Small Cap Equity Fund reported losses of more than 12% in the last 1 year. This high difference in the returns delivered by equity funds depends on numerous parameters.
The reasons for underperformance should be properly analysed such as crumbling under the weight of wrong investment decisions by the fund manager or unfavourable market sentiment or downturn in sectors of the fund’s holdings. For example, several fund houses had reduced their exposure to the auto sector in 2019 due to its lacklustre performance.
Do not cancel your SIP, Stop and Think
If the benchmark indices and category peers are performing better than the fund under consideration, one can consider exiting the fund and invest the amount in a fund with better indicators . However, if the cause of low or negative returns is the overall market sentiment, or underperformance in some of the fund’s holdings, then it is wise to wait for the storm to pass, till the market fluctuations stabilise, before making a hasty decision. Fund managers are also bound to move around allocations to reduce losses.
If you have just started investing, one year is too short a time frame to judge the performance of any mutual fund scheme. Plus, mutual fund schemes in equity investments are designed for the long term and one should stay invested in such a manner to appreciate the invested capital.
The equity market, by nature is considered volatile and hence investors should keep in mind that SIPs in these schemes should continue to be invested for a minimum of one complete market cycle. Moreover, an investor should seek opportunity in market corrections and buy quality equities at lower valuations.
Here are the three primary reasons why you shouldn’t be stopping your existing SIPs in 2021, to make the best out of your investment.
- Even though the Indian economy has not lived up to its potential in the last couple of quarters, the growth is still positive. The market along with the economy moves in an upward direction in the long run. Even though you feel that the losses will continue, and the market sentiment is not in your favour, you shouldn’t realise your losses by exiting the fund. These are short term phenomena and if you remain invested for a long term, the capital gains would be exponential.
- A market downturn could even provide an opportunity to investors. During a bearish market, you tend to buy more fund units with a given SIP installment amount, as the Net Asset Value is lower. If the historical performance of the fund has been good, coupled with prudent investment decisions by the fund managers, it is advisable to buy more units of the fund during a market downturn. This is known as Rupee Cost Averaging, which benefits you when you remain invested.
- If you have used a SIP calculator to determine your return on investment, you will notice that the key factor is the investment horizon. When you remain invested for longer time frames (let’s say 10, 20 years), your wealth will grow at an exponential pace, as you earn interest on accrued interest. Longer the investment horizon, greater will be the power of compounding, leading to large returns on investment.
Looking ahead
Analysts are optimistic about the broader market conditions, owing to timely government intervention to boost the economy, favourable market forces and the changing dynamics in the global political and economic spheres. It is suggested that investors don’t stop their existing SIP’s due to valuation concerns or the rough ride that the small cap and mid cap segment saw in 2019. Again, continuing with SIPs during market downturn will allow investors to accumulate units at lower prices and thereby, benefit from rupee cost averaging. In fact, investors with investible surpluses should top-up their existing SIPs with lump sum investments during steep market corrections. This will help them achieve their financial goals sooner.
Mutual Funds saw huge influx of retail investment in 2019, and it is predicted that the trend will continue in 2020. Only 2% of the Indian market has been penetrated by mutual funds and SIPs provide a conducive platform for anyone to invest in mutual funds. All you need is a little more patience with your investments to capitalize on this attractive investment option. There’s only one thing to remember, don’t panic over negative returns in the short term, and stay put. Happy investing!
