Mutual Fund SIP is not always profitable for all investors. Many funds often underperform or give lower than their respective index returns even as some others continue to multiply investors’ wealth. For instance, several mutual fund schemes have given lower than Fixed Deposit returns in one year. If a fund continues to remain unprofitable, it becomes natural for investors to ask how long should they continue to invest in it. FE PF Desk got in touch with Nirav Karkera, Head of Research at Fisdom, via email to get some answers. Edited excerpts:

Should an investor continue the SIP if it has not performed well in one year?

The past year has been challenging for equities, especially in terms of performance. However, it has also presented a unique opportunity to purchase high-quality stocks at reasonable valuations. This is where Systematic Investment Plans (SIPs) come into play, as they allow investors to average their costs across market cycles over a longer period.

SIPs have two important tenets. Firstly, they allow investors to average the total cost of mutual fund units by purchasing during periods of sluggish performance, such as the past year. Secondly, since equity investing is meant to be for a longer term, SIPs are more effective when continued through multiple market cycles. Therefore, making an investment decision based solely on one-year performance may be myopic.

How long should an investor continue a SIP even if it is not performing, or giving lower than index returns?

It is important to understand the root cause of underperformance. Evaluating the reason behind the underperformance can help investors determine if a switch is necessary or if it is best to remain invested.

If the underperformance is due to cyclicality and falls within the expected volatility range, investors may consider holding onto the fund for a longer period of time. However, if the underperformance is due to changes or limitations in the fund’s fundamental attributes, such as the fund management team, philosophy, risk management framework, or portfolio management style, it may indicate a structural weakness that warrants a fund switch.

Also Read: Disadvantages of Fixed Deposit: 5 reasons not to invest

It is important for investors to take a holistic approach and evaluate the performance of a fund based on its investment objectives, strategy, and overall portfolio. Short-term underperformance may not necessarily indicate long-term underperformance. Investors must also acknowledge the cost and tax incidence while switching a fund and ensure that the benefit of switching outweighs such cost.

When should an investor re-consider his/her ongoing SIP and how to do it?

Considering broader equity’s current dynamics, investors can re-consider their ongoing SIP if they foresee the need to withdraw funds in the near future. In such a scenario, it may be prudent to not only pause ongoing SIPs but also to de-risk by directing them into less volatile fixed-income funds. Additionally, gradually shifting the already built equity corpus to fixed-income funds may also be a wise move.

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What are the key points to keep in mind if an investor has to change the fund?

  • When switching current and future investments into another fund, it is important to consider the primary reason for the change.
  • Switching funds may make sense if there has been a change in the fund’s fundamentals or portfolio that no longer align with an investor’s objectives.
  • Alternatively, if an investor’s objectives have changed, it may be necessary to consider a different fund that aligns with their updated goals and overall strategy.
  • Identification of another fund that offers conviction in its ability to align with objectives and overall strategy in a more effective and efficient manner could be another reason.

What’s the biggest mistake investors generally make?

One of the biggest mistakes investors make is basing their decision solely on recent performance. Short-term performance can be misleading, as it may not accurately reflect the long-term potential of the fund. Instead, investors must focus on their own investment profile and the fund’s fundamental attributes to arrive at investment decisions.

Read next: What to do if your Mutual Fund SIP has given less than Fixed Deposit return in 1 year?

(Disclaimer: The opinions expressed in this article are that of the respective commentators. The opinions expressed here do not reflect the views of https://www.financialexpress.com)