When should you reconsider an underperforming mutual fund SIP? Here's what experts believe

Investing in mutual funds is a popular avenue for wealth creation, providing individuals with opportunities to grow their money over time. However, it's not uncommon for investors to encounter periods of underperformance, where their mutual fund returns fall behind benchmarks or peer funds.

When faced with underperformance, it becomes crucial to navigate the complexities of the investment landscape and make informed decisions about the future of your investments. In this article, we will explore steps to better understand underperformance and determine how to respond effectively.

What should you do if your SIP is not performing well?

Here are some steps to consider while reviewing your underperforming SIP:

Step 1: Understanding underperformance

Underperformance refers to a situation where a mutual fund's returns lag behind its benchmark or peers over a significant period. It is important to differentiate between short-term fluctuations and sustained underperformance before making any decisions regarding your SIP.

Step 2: Evaluate fund performance

Before taking any action, analyze the mutual fund's performance in detail. Look at its historical performance, and consistency, and compare it with relevant benchmarks and peer funds. Evaluate the fund's performance over multiple timeframes, such as three, five, and ten years, to get a holistic view.

Step 3: Define your investment horizon

Consider your investment horizon when assessing underperformance. If you have a long-term investment horizon, short-term underperformance may not be a cause for concern. Mutual funds typically experience cycles of ups and downs, and it is crucial to stay focused on the long-term goals of your investment.

Step 4: Assess fund strategy and management

Examine the fund's investment strategy and the experience and track record of the fund manager. A change in fund management or strategy could impact performance. If the fund's underperformance is due to fundamental issues within the fund, it may be worth reevaluating your investment.

Step 5: Consistency of underperformance

Consistency of underperformance is a key factor to consider. If a mutual fund has consistently underperformed its peers and benchmarks for an extended period, it may indicate deeper underlying issues. In such cases, it might be prudent to reassess your investment and explore alternatives.

Step 6: Diversification and asset allocation

Review your overall investment portfolio and asset allocation. Ensure that your portfolio is adequately diversified across various asset classes, including equity, debt, and others. Underperformance in one particular mutual fund should be evaluated within the context of your overall investment strategy.

Step 7: Seek professional advice

If you are uncertain about your decision or lack expertise in analyzing mutual fund performance, consider consulting a financial advisor. A qualified advisor can provide valuable insights and guide you in making an informed decision regarding your underperforming SIP.

Step 8: Review regularly

Regularly reviewing the performance of your mutual fund SIP is essential. Set predefined intervals, such as quarterly or annually, to assess the progress of your investments. This will help you identify any prolonged underperformance and take appropriate action if needed.

What do the experts suggest?

Mayank Bhatnagar, Chief Operating Officer, FinEdge said, “The solution to the above lies in setting up clear financial goals and aligning your SIPs to them. By doing this, you will approach your investment with more of a “goal achievement” mindset and less of a “returns centric” mindset. This will go a long way in smoothing out the behavioral biases that could hold you back from benefiting from your SIPs in the long run.”

“If you have chosen a SIP in a fund with a long-term track record that has seen through at least 3-4 market cycles, and with an expected CAGR that is aligned with your goal target CAGR, there are very few situations when you would need to stop the SIP. For instance, if the AMC itself is under duress for some reason or the fund philosophy itself has changed, you could reconsider your SIP in that fund. In almost all other situations, it is just a matter of keeping your eyes on the prize and continuing your SIP through the ups and downs,” he added.

Commenting on the same.Mr. G. Pradeepkumar, CEO, Union Asset Management said, “When it comes to deciding whether or not to continue an SIP under a scheme basis the performance of the scheme, it is important to focus on the long-term prospects. Even if such a scheme is not performing well in the short term, it's advisable to stay invested, as temporary market downturns can occur. We believe that the long-term prospects of Indian equity markets are promising, so it would be prudent to continue the SIP.”

“However, if an investor has been investing in a scheme through an SIP for three years or more and still finds the scheme significantly underperforming compared to peers, it might be worth for the investor to consider a shift to another fund. It's essential not to be overly concerned about short-term market fluctuations, as the market has the potential to pick up in the long run,” he added.

Adding his views, Rahul Jain, President & Head, Nuvama Wealth said “The continuation of a SIP in a fund will depend on the performance of the fund. The fund’s performance must be tracked for 2-3 months to establish the main reason for underperformance. If a fund consistently underperforms its benchmark and peers for fundamental reasons such as incorrect sector calls or a flawed stock selection strategy, the SIP must be terminated, and the units must be redeemed immediately.”

Remember, seeking professional advice and reviewing your investments regularly are valuable practices to optimize your investment journey and adapt to the dynamic nature of the financial markets.

Mutual fund SIP accounts stood at 6.42 crore and the total amount collected through SIP during April 2023 was ₹ 13,728 crore