Dealing with Loss-Making SIPs

Despite diligently investing in mutual funds via regular SIPs with honesty and consistency, investors may still encounter negative returns. In such situations, it’s crucial for investors to understand the underlying factors leading to negative returns and take necessary steps. Rakesh Deshmukh takes a closer look at this scenario 

Have you ever experienced buying a product, such as an electronic gadget or a mobile phone, for around ₹50,000, only to find it later available at a discounted price of, say, ₹45,000? It’s a common occurrence where items purchased at one price are subsequently found at lower prices. Similarly, in the world of financial markets, you might plan to purchase shares of your favourite company, monitoring them closely for a month before buying. However, sometimes after your purchase, the share price drops below your purchase price, resulting in the shares trading at a discounted price compared to what you paid. [EasyDNNnews:PaidContentStart]

Furthermore, a similar situation may arise in your mutual fund investments. For instance, consider having a monthly SIP of ₹5,000 that you started a year ago. Despite 12 months passing, you find that the investment is showing a negative return or that the current investment value has fallen below the total amount invested. When faced with such a scenario, it’s important to pause and carefully consider your options. If you haven’t encountered this situation yet, it’s fortunate, but it’s also an opportunity to educate yourself and prepare for what actions to take if it were to occur. Looking for a strategy directly is not suitable for everyone. Firstly, investors should understand the factors that affect their investments in market-linked instruments such as stocks or mutual funds. 

Understanding the Factors Contributing to Losses in SIP Investments
Before finding any strategies for managing loss-making SIPs, it’s essential to identify the factors that can contribute to losses in SIP investments. SIPs, by nature, involve periodic investments at different market levels, meaning that your investments are not timed to perfection. Various factors can lead to losses, including: 

1) Market Trend - You have probably heard the phrase ‘the trend is your friend’ from many sources. If you started your SIP during a downtrend and that downtrend persisted for a prolonged period, or even if the market entered a consolidation phase thereafter, your SIP might not become profitable or could show negative returns on your investment. Check the current market trend – if it’s falling, it’s possible that your SIPs in mutual funds are showing negative returns or losses on investments. 

For example, if you had started an SIP of ₹5,000 in October 2021 when the market reached a peak, and by July 2022 it was in a consolidation phase, specifically forming lower lows, your investment value would have turned ₹36,733 over the 20-month period against an investment of ₹40,000, thus representing a loss of ₹3,266 or 8.17 per cent. 

2) Asset Class Performance - The performance of the underlying asset classes within your mutual fund portfolio plays a crucial role in determining SIP returns. For instance, equity mutual funds invest primarily in stocks, which can experience periods of growth and decline. During a market downturn or bearish phase, the prices of stocks may decrease, impacting the overall performance of equity-oriented SIPs. 

3) Economic Factors - Broader economic conditions, including factors such as GDP growth, inflation rates and geopolitical events, can significantly impact mutual fund performance. Economic recessions or downturns may adversely affect corporate profitability, leading to reduced earnings for companies in which mutual funds invest. Consequently, mutual fund returns may be negatively impacted during periods of economic uncertainty or contraction. 

Let’s say you started an SIP of ₹5,000 when the market was at a high during 2019, but suddenly the corona virus-triggered pandemic hit the world. Not only did the Indian economy contract, but the global economy also fell into recession, greatly impacting all the markets. Stock prices fell drastically, and eventually, the equity fund where you had started your SIP also experienced declines. 

4) Fund-Specific Factors - Several factors specific to the mutual fund itself can influence SIP performance. The competence and strategy of the fund manager play a crucial role in navigating market conditions and achieving investment objectives. High fund management fees can erode returns over time, while changes in a fund’s investment strategy or objective may alter its risk profile and potential returns. 

5) Insufficient Diversification - Diversification is a fundamental principle in investment management aimed at reducing portfolio risk. SIP portfolios that lack diversification may be disproportionately exposed to risks associated with specific sectors, industries or asset classes. For instance, a portfolio heavily concentrated in technology stocks may experience significant losses during a downturn in the technology sector. Adequate diversification across various asset classes, industries and geographical regions can help mitigate risks and improve the resilience of SIP portfolios against market fluctuations. 

For instance, an employee working in the IT sector, observing its growth and that of the IT industry, decides to invest all his savings in IT funds. He starts SIPs of ₹10,000 exclusively in an IT fund from the beginning of 2022. During this period, the IT industry experiences a downfall after reaching a peak point and even after one year of regular contribution it gives a negative return as presented below. Due to over-concentration in IT alone, the SIP portfolio turned negative. Furthermore, the IT sector has not yet crossed its previous peak level, unlike other sectors which are trading at their all-time highs.

Dealing with Loss-Making SIPs
Here are strategies to manage loss-making SIPs effectively. Before delving into the strategy, one thing you must keep in mind is that the market is designed to move upwards rather than downwards. If it has recently fallen from its peak, it will surely recover after some time. Check the history of the Indian market – from 1,000 to 80,000, the Sensex has rallied since its inception with small ups and downs. 

01) Evaluate Your Investment Horizon - First and foremost, it’s crucial not to make hasty decisions based on temporary market movements. SIPs are designed for long-term investment, and short-term volatility is a natural part of the equity markets. Panicking and redeeming your investment hastily due to temporary losses can potentially lead to missing out on future gains when the market recovers. Patience is often rewarded in investing. As discussed earlier, diversification is a very important aspect in investing. Despite this, if the investor had continued with the SIP of ₹10,000 in IT funds until today, would his SIP portfolio still be negative? Let’s identify its returns over the period. 

Source: Crisil 

Based on the above data, investors need to be patient and continue their investments without making decisions based on emotions, even when facing negative earnings in their SIP portfolio. Resist the temptation to halt your SIPs during periods of underperformance. Continuing with your SIPs allows you to benefit from rupee-cost averaging, where your investments purchase more units when the prices are lower, potentially reducing your average cost per unit over time. 

As can be seen in the short term, SIPs may showcase negative returns or struggle to achieve better returns. However, over time, the impact of news or events becomes less significant in affecting the performance of your SIP portfolio. The investment horizon always has an impact on your SIP portfolio – longer the tenure the less will be the volatility. 

02) Assess Fund Performance - When your SIP shows negative returns, it’s advisable to assess the performance of your fund relative to others in the same category. If most funds in the category are experiencing similar downward trends, it suggests that the negative performance may be due to broader market conditions rather than specific issues with your fund. Just relate to the above example of the IT fund scenario discussed in the diversification section. Furthermore, comparing your fund’s performance across different categories can provide a broader perspective on market trends and help you evaluate whether your investment strategy remains aligned with the prevailing economic environment. 

03) Align with Investment Goals - Confirm that your SIPs align with your investment goals and risk tolerance. Choose funds whose objectives and strategies match your financial objectives, whether they are for wealth accumulation, retirement planning or other goals. 

04) Monitor Expenses - It’s important to closely monitor the expenses linked to your mutual funds. High expense ratios can gradually erode your returns over time. Therefore, regularly review the fees and expenses you are paying. If you find that the fees are disproportionately high compared to the fund’s performance and benchmarks, consider exploring alternatives with lower expenses. Switching to funds with lower expense ratios can potentially improve your overall returns, as more of your investment can be put to work for you rather than being consumed by fees. This proactive approach to managing expenses is a fundamental part of optimising your investment strategy and ensuring that your portfolio is efficient in generating returns. 

05) Seek Professional Advice - If you have made decisions in the past that did not yield good results and still feel uncertain about managing your SIPs, seek advice from a financial advisor. An advisor can provide personalised guidance tailored to your financial situation and goals, helping you navigate market volatility effectively. 

06) Review Asset Allocation - Revisiting your asset allocation strategy is crucial to ensure it aligns with your risk tolerance and financial objectives. Regularly assess and adjust your allocation to maintain a balanced portfolio that reflects your current financial circumstances and market conditions. Diversifying across different asset classes such as equity, commodity, debt and ETFs can help spread risk and optimise returns over time. When constructing your SIP portfolio, consider the various subcategories within each asset class. For example, within equity, you have Large-Cap, Mid-Cap and Small-Cap funds. Avoid over-concentration in any single fund type to mitigate the risk of adverse impacts on your SIP profitability. 

Recall the pandemic when the equity markets were falling significantly. During that time, gold prices surged, as shown in the chart where the orange line represents Nifty, and the black line represents gold. If you had SIPs in any gold funds during the pandemic period, your portfolio might not have been as negatively impacted compared to a portfolio solely invested in equities. Alternatively, you may have even enjoyed positive returns during that market downturn. This example highlights the importance of asset allocation in constructing a robust portfolio. 

07) Stay Informed and Review Portfolio Regularly - Stay informed about economic and market conditions that may impact your SIP investments. Being knowledgeable about current market trends and developments empowers you to make informed decisions. Additionally, conduct regular reviews of your portfolio to evaluate fund performance and the effectiveness of your overall investment strategy. Adjust your SIPs or portfolio allocation as necessary to maximise your investment outcomes over time. 

08) Diversification - Diversification is a fundamental strategy for managing risk in investments. If your SIP is heavily concentrated in a particular sector or category that is experiencing losses, consider diversifying your portfolio across different sectors or asset classes. By spreading your investments, you can potentially mitigate risks associated with sector-specific downturns and improve the overall resilience of your portfolio. 

09) Expect the Market to Recover over Time - As discussed, historical data demonstrates that financial markets generally recover over the long term, despite short-term fluctuations. A negative SIP today does not necessarily indicate a permanent loss. By staying patient and maintaining your investment discipline, you position yourself to potentially benefit from the eventual recovery and growth of the market. 

10) Understand the Risk and Reward Balance - Investing in SIPs entails recognising the trade-off between risk and reward. Investments with higher return potential typically come with higher risks. Acknowledging this balance can help you maintain a rational perspective during market downturns and avoid making emotional decisions that could impact your long-term financial goals. 

Conclusion
In conclusion, navigating through the ups and downs of SIP investments requires a balanced approach and a long-term perspective. Just as we sometimes see products bought at higher prices later available at discounts, SIP investments can also experience periods of negative returns due to market fluctuations, economic conditions, or fundspecific factors. Understanding these dynamics is crucial for investors aiming to manage their SIP portfolios effectively. The key strategies include maintaining patience during market downturns, evaluating fund performance against peers, and ensuring alignment with personal investment goals and risk tolerance. 

Diversification across sectors and asset classes, regular portfolio reviews, and staying informed about market trends further bolster resilience against volatility. Ultimately, while short-term setbacks may occur, historical evidence demonstrates that markets tend to recover over time. By staying disciplined, informed and mindful of the risk-reward balance, investors can navigate through uncertainties and position themselves to capitalise on opportunities for long-term growth in their SIP investments. 

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