When SIP In Mutual Funds Fail: Three Key Reasons Your Returns Can Disappoint

Many investors believe that doing an SIP (Systematic Investment Plan) in mutual funds automatically ensures great returns. But in reality, SIPs work wonderfully only when a few conditions fall into place. And when they don’t, the results can turn out very different from what you had planned for.

Here are three factors that you must factor in while investing via SIP to enjoy greater benefits over the long run.

Assuming 12 per cent Returns

Systematic Investment Plans (SIPs) do not guarantee the best returns. In other words, not everyone who invests in mutual funds via SIP makes similar returns. For instance, flexi cap funds, in the last 10 years, have generated SIP returns ranging from 10.44 per cent to 22.69 per cent. But most investors usually assume 12 per cent returns while planning for goals by using SIP calculators available online. However, as noted, returns are not uniform.

Thus, if your financial planning relies strictly on a 12 per cent return expectation, you may feel disappointed if your investments give you lower returns.

We looked deeper. An investor who started a 10-year SIP in the Nifty 50 index, an index that represents the country's largest 50 companies, on January 1, 2007, would have realized returns of 9.35 per cent.

Whereas, an investor who would have started in 2008 would have seen 10-year returns of 12.13 per cent.

The overall range observed in these historical 10-year SIP returns varies from 9.35 per cent to 22.62 per cent. Thus, investors must understand that investment returns depend on the market conditions and timing. So, instead of relying on the assumed 12 per cent returns, do the calculations at lower returns, say 9 or 10 per cent, as well, and plan your investments to fulfill your long-term goals accordingly.

Chasing High-Return Funds

While many investors focus narrowly on returns, often chasing top-performing funds, the amount invested is equally important.

For instance, in the last 10-year investment period, Parag Parikh Flexi Cap Fund has been a top performer, while Kotak Flexi Cap Fund also performed well but yielded returns approximately 4.5 to 5 percentage points lower.

An investor contributing Rs 5,000 monthly to the Parag Parikh Flexi Cap Fund for 10 years would have achieved a 21.8 per cent return, growing the investment value to around Rs 19 lakh. However, an investor contributing a higher monthly amount of Rs 7,000 to the Kotak Flexi Cap Fund, which returned 17.3% over the same time period, would have grown their investment to approximately Rs 21 lakh.

So, while historical performance is an important factor in selecting a mutual fund, an investor should not underestimate the importance of investment amount, per se.

Stagnant SIP Contributions

As our income levels rise, we tend to move to a better lifestyle. Most people increase their spending as they start to earn better. But they forget to increase their investments. This can hurt their long-term goals. For instance, if an investor is currently investing Rs 5,000 via SIP for his retirement goal at his income level of Rs 40,000 per month. Over the years, his income has doubled, so has his standard of living.

But as far as his investments are concerned, he did not bother to increase them. So, over the years, his lifestyle got better. He started going to expensive restaurants and wearing branded clothes. But if he does not increase his investments, he will be disappointed at the time of retirement.

Since, with the current income levels, he won’t be able to sustain his improved standard of living.

Therefore, the practical strategy is to incrementally increase your SIP amount every year or as your income level rises. You can even opt for Step-up SIP, where you select at what percentage your income levels should rise every year. It can be 2 per cent or 5 per cent or 10 per cent or even higher.

Here’s an example to show how much difference a stagnant vs a Step-Up SIP can make to an investor’s portfolio.

An investor invests Rs 10,000 per month via SIP in an equity mutual fund that delivers a return of 12 per cent p.a. After 20 years, that investor would build a corpus of Rs 91.98 lakh.

Now, instead of contributing the same investment for 20 years, if that investor had increased his SIP amount by 10 per cent every year, his final corpus could have more than doubled to Rs 1.86 crore.

At the end of the day, SIPs are still one of the most reliable ways to build wealth, but only when used with the right expectations and strategies. If you plan realistically, invest consistently, and increase contributions as your income grows, your long-term goals stand a far better chance of becoming reality.