SIPs Face Losses: Volatility Exposes Fund Selection Risks

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AuthorAarav Shah|Published at:
SIPs Face Losses: Volatility Exposes Fund Selection Risks
Overview

Systematic Investment Plans (SIPs) in Indian equity funds are experiencing negative returns over one to three-year horizons, driven by heightened market volatility from geopolitical tensions and macro uncertainties. While long-term (10-year) SIP performance remains robust, the recent downturn highlights the critical importance of meticulous fund selection and strategic timing, proving SIPs are not automatic wealth creators. The divergence between top and bottom performers shows significant selection risk, especially in mid and small-cap segments, challenging the 'SIPs sahi hai' adage for shorter investment cycles.

Understanding SIP Performance

Recent data shows many equity funds are experiencing negative short-term returns. This reality requires looking deeper than just consistent investment. The dip challenges the common belief that Systematic Investment Plans (SIPs) automatically build wealth, especially in difficult market conditions. While disciplined investing is vital, it's not enough without smart fund selection and understanding wider market trends.

Market Volatility Hits SIP Returns

Geopolitical tensions, including the US-Iran conflict, alongside ongoing economic uncertainties, have caused significant volatility in Indian equity markets. This has directly led to a sharp fall in short-term SIP returns, with one- to three-year periods now showing negative performance in most equity fund types. Data indicates the Nifty 50 has seen substantial corrections, while mid- and small-cap segments have fallen even more sharply. As a result, the popular 'SIPs sahi hai' (SIPs are good) slogan is being tested, as investors systematically adding funds are seeing their capital values decrease in the short term, a stark contrast to the positive results seen over many years.

Performance Gaps and Fund Selection

The difference in performance between the best and worst funds, even within the same categories, highlights the significant risk of poor fund selection. For example, while ten-year SIP returns are still strong, the short-term outlook is bleak. Large-cap funds, typically considered safer, showed weak one-year returns: the category average was 1.19%, but large-cap SIPs averaged -12.43%. Mid-cap funds' assets under management (AUM) grew at a 32.41% compound annual growth rate (CAGR) over five years, reaching ₹4.62 lakh crore by February 2026. Small-cap AUM grew even faster at 39.93% CAGR to ₹3.64 lakh crore. These growth areas are also more vulnerable to volatility, with small-cap indices seeing major drops. Despite this, SIP inflows remain strong, reaching ₹29,845 crore in February 2026, a 14.79% year-on-year increase, and total SIP AUM hit a record ₹16.64 lakh crore. This suggests retail investors are committed, expecting a long-term market rebound. Analysts predict a better risk-reward balance in 2026, depending on earnings recovery in FY27. However, global issues like China's slowing economy, stable US Fed rates, and currency challenges, including a weaker rupee affecting exports, add to economic hurdles.

Short-Term Risks and Investor Psychology

The current market situation serves as a warning for investors who rely only on SIPs. The significant increase in short-term negative returns, particularly in mid- and small-cap funds, emphasizes the inherent 'selection risk' and the possibility of 'bad timing.' Investors who entered the market during calmer periods might now face losses due to the market's downward trend and their continued purchases at lower Net Asset Values (NAVs). While a ten-year investment horizon can smooth out these short-term losses, the immediate financial and psychological impact can be severe. Historical data from the 2020 COVID crash shows that investors sometimes stop SIPs during panics, even if total inflows seem steady, creating a cycle that can harm long-term gains. The need for skilled fund managers to navigate volatility is clear, as shown by the wide performance differences between and within fund categories. Global events, affecting oil prices and trade, add further uncertainty, impacting sectors like airlines and manufacturing, and potentially affecting the stability of the Indian Rupee. With market volatility expected to continue through March 2026, such short-term negative SIP performance could persist, making optimistic FY27 earnings forecasts harder to achieve.

Looking Ahead: Cautious Optimism

Despite current challenges, analysts offer a cautiously optimistic outlook for Indian equities in 2026, expecting a better risk-reward balance as valuations become more reasonable. India's long-term growth story, driven by domestic demand and policy continuity, remains strong. However, sustained returns will critically depend on an earnings recovery in FY26, following a subdued FY26. Experts recommend staggered investments and diversified equity portfolios to manage current uncertainty. While mid- and small-cap funds still appeal for their growth potential, investors must be ready for higher volatility and longer recovery times, ideally with investment horizons of ten years or more. The strong SIP inflows, even with short-term losses, signal growing investor confidence in disciplined, long-term investing – a strategy historically proven to navigate market cycles.

Disclaimer:This content is for informational purposes only and does not constitute financial or investment advice. Readers should consult a SEBI-registered advisor before making decisions. Investments are subject to market risks, and past performance does not guarantee future results. The publisher and authors are not liable for any losses. Accuracy and completeness are not guaranteed, and views expressed may not reflect the publication’s editorial stance.