When it comes to investing, especially through Systematic Investment Plans (SIPs) in mutual funds, many investors expect quick results. But the reality is, SIPs are not designed for instant gratification;
Evaluating SIPs During Market Corrections – Continue or Pause?
Market corrections can be unsettling. When equity markets fall, SIP investments often show negative or flat returns, leading investors to question whether they should pause their contributions.
The golden rule is: don’t stop your SIP during corrections. In fact, these are the times when SIPs work best. By continuing, you buy more units at lower NAVs, which reduces your overall cost of investment. Over the long term, these “cheap” purchases become the foundation of strong returns once markets recover.
Pausing SIPs during volatility means missing out on this benefit. Instead of fearing red numbers on your statement, think of corrections as a sale season for long-term investors.
SIP Returns vs. Fixed Deposits – How to Address the Comparison
A common frustration among new investors is comparing SIP returns with Fixed Deposits (FDs). In the short run, FDs often appear more attractive because they provide guaranteed, stable interest. For example, if you start a SIP and after 2–3 years the equity market has underperformed, your returns might even be lower than FD rates.
But here’s the key difference:
-
FDs provide security but limited growth. They usually don’t beat inflation in the long term.
-
SIPs, especially in equity funds, provide volatility initially but offer inflation-beating returns over 7–10+ years.
An SIP is not meant to outperform FDs in 2 years—it is designed to create wealth in 10–15 years. For financial goals like retirement, child education, or wealth creation, SIPs are far more powerful than FDs. So, instead of comparing them directly, understand that they serve different purposes in a portfolio.
Assessing Fund Performance – When Does Switching Make Sense?
Not all SIPs are created equal. While market cycles impact all funds, consistent underperformance of a fund compared to its peers and benchmark is a red flag. But switching should not be a knee-jerk reaction to short-term dips.
Here’s when you should consider switching:
-
Persistent underperformance – If a fund has underperformed its benchmark and peers for 3+ years despite a market recovery, it may be time to shift.
-
Change in fund strategy – If the fund manager changes the investment approach in a way that no longer matches your risk appetite.
-
Better alternatives available – Sometimes, another fund in the same category may consistently deliver better risk-adjusted returns.
The best practice is to evaluate your funds annually. Don’t judge them solely on 6–12 months of data. SIP investing rewards patience, but patience should not mean ignoring poor-quality funds.
Role of Small Caps & Thematic Funds in Portfolio Allocation
While large-cap and diversified equity funds form the backbone of an SIP portfolio, many investors wonder about small-cap and thematic funds. These funds can deliver very high returns, but they also come with significant volatility.
-
Small Cap Funds – They can create wealth if held for a long horizon (7–10 years). However, they should not form the bulk of your SIP. A 10–15% allocation is sufficient for most investors.
-
Thematic Funds – These are based on specific ideas like technology, healthcare, or infrastructure. While attractive during certain cycles, they are risky if over-allocated. Consider them as a satellite investment, not the core.
In other words, small-cap and thematic SIPs are like spices in your investment recipe. They can enhance overall returns but should not replace the main course of large-cap, flexi-cap, or multi-cap funds.
Why a Slow Start is the Best Start
The first 2–3 years of an SIP can feel underwhelming because compounding hasn’t yet shown its magic. But as the years progress, the power of rupee cost averaging and compounding accelerates returns. By the 7th or 10th year, the growth often surprises investors who stayed disciplined.
So, a slow start is not a setback—it’s a natural phase. It allows you to build a habit, adjust expectations, and accumulate units at various market levels. What matters is not how your SIP looks today but how it performs over decades.
Final Thoughts
An SIP is not a sprint; it’s a marathon. Market corrections, slow starts, and short-term volatility are all part of the journey. Comparing SIPs with FDs is unfair, switching funds should be thoughtful, and small caps/thematic funds should play a limited but strategic role.
If you stay the course, what seems like a “slow” start today will eventually transform into a strong foundation for tomorrow’s wealth.
Comments
Post a Comment