SIP returns disappointing? Here's when to stay invested and when to switch funds

A few years of disappointing SIP returns are often enough to make investors question whether they have chosen the wrong mutual fund. The temptation to stop investing or switch to a fund that has recently outperformed is especially strong when markets are volatile and portfolios remain in the red.

Investment experts, however, caution against making decisions based on short-term returns alone. They say equity mutual funds need time to navigate market cycles, and investors should first determine whether the underperformance is driven by broader market conditions or reflects a structural problem with the fund itself.

According to Jiral Mehta, Senior Manager, Research at FundsIndia, weak returns in the early years of an SIP are expected because the investment corpus is still being built and short-term market movements have a greater impact on overall returns.

She said investors often go through phases where returns are disappointing, frustrating or even negative before the benefits of long-term compounding become visible.

Debasish Mohanty, Chief Strategy Officer at The Wealth Company Mutual Fund, said the timing of when an SIP begins can also influence early returns. An investor who starts investing just before a market correction may see muted or negative returns initially, even if the fund is fundamentally sound.

"Every SIP instalment during a downturn buys more units at lower net asset values (NAVs). The benefit of those purchases becomes visible only when markets recover," he said.

Experts say investors should avoid evaluating an equity fund based on one or two years of performance. Instead, a three- to five-year period, preferably covering a full market cycle, offers a fairer assessment.

Mehta noted that even well-managed funds can underperform their benchmark from time to time. "The right question isn't whether a fund is behind right now. It's whether the fund is going through a normal rough patch or whether something has structurally changed," she said.

A temporary decline in returns alone is rarely a good reason to stop an SIP or move to another fund, experts said.

Instead, investors should first compare the fund's performance with its benchmark and category peers. If the fund has fallen broadly in line with the market, the weakness is likely market-driven. However, if it has consistently lagged both its benchmark and comparable funds over several years, it may warrant a closer review.

Mehta said investors should also look for structural changes such as a change in the fund manager, a shift in the investment strategy or mandate, or an increase in the fund's risk profile that no longer matches their financial goals.

Mohanty added that investors should also factor in tax implications, exit loads and the impact on their overall asset allocation before switching funds.

Both experts cautioned against stopping SIPs during market downturns.

According to Mehta, doing so deprives investors of the opportunity to accumulate more units at lower prices, one of the key advantages of systematic investing. Mohanty said another common mistake is reacting to short-term performance by frequently switching funds, instead of allowing sufficient time for the investment strategy to play out.

For long-term investors, they said, patience and periodic reviews are often more rewarding than reacting to temporary market volatility.