Impact of Market Decline on SIP Returns: What Investors Need to Know

Market Volatility and Its Effects on SIPs

The recent downturn in equity markets has caused concern among retail investors, particularly those utilizing systematic investment plans (SIPs). The Nifty 50 index has fallen over 8% this year, influenced by global uncertainties and rising crude oil prices due to tensions between the US and Iran. This decline has adversely affected short-term SIP returns, leading many investors to reconsider their strategies. For those who initiated SIPs recently, the current market conditions have resulted in negative returns over the past year, prompting some to stop their contributions. This trend is evident in the SIP stoppage ratio, which reached 100% in March, indicating that more SIPs were either discontinued or matured than those newly started. The market experienced heightened volatility in March, with the Nifty 50 dropping by 11.3% amid growing geopolitical tensions. Consequently, one-year SIP returns across equity mutual funds have turned negative. Flexi-cap funds reported an average one-year SIP return of -17.63%, while large-cap funds saw a decline of -17.2%. Other categories, including large and mid-cap funds, mid-cap funds, and small-cap funds, also experienced significant drops, with multi-cap funds averaging -16.69% in returns, as reported by a financial publication.

Even over a three-year horizon, returns have significantly decreased. Flexi-cap funds yielded an annualized return of just 1.97%, while large-cap funds offered 1.69%. Mid-cap funds performed slightly better at 5.59%, yet still fell short of expectations typically seen during bullish market phases.

Understanding SIP Returns in Early Years

A major reason for these disappointing returns is the method used to calculate SIP performance. The returns are assessed using XIRR, which considers the timing of each investment installment. In the early stages, many contributions have not had sufficient time to benefit from compounding. If the market declines during this period, the returns appear disproportionately weak as recent investments are immediately affected by falling prices.

As time passes and the investment corpus increases, earlier contributions start to have a more significant impact on returns. This helps mitigate the effects of short-term volatility and enhances the effectiveness of compounding. Market corrections are when SIPs showcase their fundamental strength through rupee cost averaging. By investing a fixed amount regularly, investors acquire more units when prices drop, effectively lowering their average purchase cost. Amol Joshi, founder of Plan Rupee Investment Services, emphasized that 'rupee cost averaging is beneficial during volatile, sideways, or bearish market conditions.' This strategy ensures that investors accumulate more units during downturns, potentially leading to greater gains when the market rebounds. Halting SIPs during such times can result in missing out on these advantageous lower-cost opportunities.

Current Trends and Investor Behavior

While the increase in the SIP stoppage ratio may seem concerning, experts believe it does not necessarily indicate a fundamental change in investor behavior. Joshi noted that 'new investors have exhibited some anxiety and raised questions during this volatile period. However, we have advised them to remain focused on their long-term objectives and adhere to their asset allocation strategies.' Dhirendra Kumar, founder of a mutual fund tracking platform, pointed out that 'monthly SIP flows continue to rise, indicating that the underlying investment habit remains strong. The nervousness is primarily among newer investors who expected past returns to persist.' He added that some investors have paused their contributions or withdrawn funds for legitimate cash needs, which is a minor and anticipated adjustment rather than a disruption in the SIP trend.

Swarup Mohanty, CEO of Mirae Asset Investment Managers (India), also remarked that 'new investors who began investing based on previous returns may feel let down. However, such market phases provide valuable lessons on the importance of long-term investing, as market fluctuations are a natural part of the process.' Despite the volatility, monthly SIP inflows increased by 7.5% in March, reaching Rs 32,085 crore, indicating that experienced investors are maintaining their investments and, in some cases, even increasing their allocations. Weak short-term SIP returns are not uncommon during market downturns, and experts advise investors, particularly those new to SIPs, to avoid overreacting to temporary declines.