Why your SIP may not be delivering the returns you expect: Mistakes that mutual fund investors should avoid

A systematic investment plan (SIP) allows individuals to invest a fixed amount in mutual funds at regular intervals. However, just because you are putting money in one or multiple funds every month does not mean your investments will deliver the desired results after a certain period.

The choice of fund, investment discipline and alignment with financial goals can all influence outcomes. For investors who feel their SIP is not working as expected, the issue may not be the investment route itself but how it is being used. Here are some reasons that could be affecting your mutual fund returns.

Investing without a clear goal

An investor’s allocation in mutual funds or any other financial asset should be based on their risk capacity, investment horizon, financials goals and the overall balance of their portfolio, rather than on funds where other investors are putting their money, according to Harendra Zatakia, a Sebi-registered investment advisor and founder of Wealth Aligned Financial Advisory.

Another common mistake is solely chasing returns. Investors often pick mutual funds based on how much returns they have given in the last 1, 2 or 5-year periods. Though, it can be a useful way to gauge a fund’s performance, solely depending on it can lead to disappointment.

This is because a fund’s past performance does not guarantee future returns. A fund that performed exceptionally well in the past may not remain a market leader forever. Similarly if a fund starts underperforming, it does not necessarily mean that it is unattractive or unsuitable.

Stopping SIPs during market downturns

The costliest mistake many SIP investors make is stopping their investments when markets fall and mutual fund units become cheaper. SIPs work through rupee-cost averaging, meaning a fixed monthly amount buys more units when prices are low and fewer when prices are high.

If you pause during a fall, you skip the exact instalments that would have bought your cheapest units. The averaging benefit only shows up if you keep buying through the dip, not around it, according to a report by Value Research.

Citing an example, the report noted that a ₹10,000 monthly SIP shows the cost of pausing during a market correction. Suppose the NAV of an equity fund falls from ₹50 to ₹35 over four months.

Continuing the SIP means investing ₹40,000 across NAVs of ₹50, ₹45, ₹40 and ₹35, accumulating roughly 941 units. If you pause and resume only after the NAV recovers to ₹50, the same ₹40,000 buys just 800 units.

That is a difference of 141 units, worth approximately ₹7,050 at the recovered NAV. The example shows why rupee-cost averaging works only when investors continue buying through market downturns. No market timing is required, just consistency, especially when markets feel most uncomfortable, the report said.

Choosing funds that don’t match your goals

An investor should not pick random funds. For instance, if you want send your child for abroad education in three years, then you are not supposed to treat an equity SIP the same way as someone saving for retirement 30-40 years away.

Funds with higher equity exposure, particularly those investing more in mid- and small-cap stocks, may offer greater growth potential over the long term. However, they can also experience significant short-term declines.

If you are uncomfortable with volatility, a market correction may prompt you to pause or redeem your SIP. In such cases, you may be better off choosing more liquid funds that offer greater stability and are less prone to sharp changes.

Zatakia also added that a practical approach towards investing in mutual funds would be to avoid relying heavily on small-cap performance if you need money for a goal within the next three to five years. Someone investing for a goal 15–20 years can take a different level of equity risk.

“I would ask an investor a very simple question: If your small- and mid-cap allocation falls 40%, what will you do? If the honest answer is that they would probably sell, then the allocation is probably already too high,” he said, advising investors to minimise their exposure to the so-called “high risk” funds if their risk-appetite is low or they need funds in a few years.