Can SIP Go in Loss - How to Deal with Loss Making SIPs (2024)

A Systematic Investment Plan (SIP) is a reliable investment strategy for mutual fund investors who want to benefit from compounding and rupee cost averaging. However, many investors often wonder: Can a SIP go into losses? The short answer is yes.

SIP loss can occur if the value of the underlying assets in the fund decreases, causing the NAV of the fund units to fall below the NAV at which you invested. In this article, we will explore the various reasons for a SIP loss and what you can do in case this happens.

Definition of SIP

A Systematic Investment Plan is a strategy that helps you invest in mutual funds conveniently. It involves investing small sums of money in the chosen mutual fund scheme at regular intervals. The amount invested in each SIP instalment is typically fixed, although it can be increased in step-up SIPs. This method is a more convenient alternative to investing a lump sum amount because many investors may not have a huge sum at their disposal.

With a SIP, you can start investing in mutual funds even with just Rs. 500 a month. Micro SIPs make mutual fund investments even more affordable as they allow you to start investing with just Rs. 100.

With time, the regular contributions you make to your chosen mutual fund scheme start to add to your corpus. Each instalment gets you more units in the scheme, depending on the prevailing net asset value (NAV) of the fund. If the NAV rises, you may be able to purchase fewer units. If the NAV falls, you may be able to purchase more units. In this manner, SIPs help you ride out short-term market volatility and benefit from the effect of compounding over the long term.

That said, SIPs do not offer guaranteed returns. A SIP can go into losses based on the market performance.

Key reasons why your SIP might be losing money

Beginners who are just getting started with SIPs may panic if their SIP investments show a loss. However, SIP losses are fairly common and may not be permanent if the market bounces back. Here are the top reasons for SIPs losing money.

1. Market risk

Market risk refers to the possibility of your investments declining in value because of market forces. Equity mutual funds, in particular, are prone to market risks. So, if the fund value goes below the amount that you originally invested, you may face a SIP loss. That said, if the market bounces back, the SIP may become profitable again.

2. Low market liquidity

Low liquidity in the market may occur if the bid-ask spread is too high. This makes it harder to redeem your investments. While popular mutual funds may not have this issue, other schemes may be harder to redeem. So, while you wait for the liquidity to increase, your SIP can go into a loss if the market performs poorly.

3. Interest rate fluctuations

This is a risk associated with SIPs in debt funds. When interest rates rise, the values of bonds decline. So, if you have invested in debt funds via a Systematic Investment Plan and interest rates in the economy rise, your mutual fund value may decline. Depending on how much it falls, an SIP loss may occur.

The need for disciplined investments and patient redemptions

Even if you know that your SIP can go into a loss, it is natural to panic initially if you notice that your SIP is losing money. However, keep in mind that this is a long-term investment strategy that requires patience and discipline. You need to avoid making impulsive decisions and refrain from redeeming your SIP investments the moment you notice negative returns. Instead, focus on disciplined investments and patient redemptions that will help you ride out short-term market volatility and potentially benefit from long-term capital appreciation.

The advantage of rupee cost averaging

One of the major advantages of SIPs is rupee cost averaging. This is essentially the phenomenon that causes your total investment cost to reduce in a falling market, so you can avoid the issue of timing the market that typically comes with lump sum investments. Let us further explore the concept of rupee cost averaging in Systematic Investment Plans.

Say you invest Rs. 5,000 in a mutual fund scheme each month. Here is how the benefit of rupee cost averaging plays out in the market over 12 months.

As you can see, the average cost per unit reduces initially as the NAV decreases, highlighting the benefit of rupee cost averaging. The average cost per unit may increase slightly as the NAV goes up in the later months, but it remains lower than the initial investment cost due to the lower average cost accumulated during the lower NAV months.

What to do if your SIP investment turns negative?

Instead of panicking in the face of a SIP loss, it helps to have an actionable plan that can make it easier for you to decide how to proceed. The following pointers may be useful since a SIP can go into a loss at any time depending on the market movements.

1. Do not immediately redeem your investments

Your natural reaction may be to sell your investment immediately. However, it helps to be patient and wait before you panic-sell. SIPs are meant to be long-term investments. So, if you attempt to sell off your holdings each time you notice a SIP loss, you will consistently lose your capital.

2. Evaluate the performance of the fund

Assess the performance of the mutual fund scheme you have invested in. Compare the mutual fund with other schemes in the same category to understand if they are also experiencing similarly low returns. If most funds in the category are also making losses, it may be a broad market or sectoral issue that may be resolved soon.

3. Understand the reason for the loss

Before deciding whether to continue or stop your SIP, you must understand the reason for the SIP loss. This will help you understand if the setback is temporary or more long-term in nature. Losses may be caused by company-specific issues, changes in the fund management or even temporary sectoral dips due to regulatory changes.

4. Consider diversification

At this juncture, you can leverage the market situation and use it to diversify your portfolio further. By including investments that are performing well when your SIP is in red, you can offset the loss and also reduce the overall risk in your portfolio. This also gives your asset mix an inherent hedging advantage.

5. Look into the risk-reward ratio

The risk-reward ratio of your SIP strategy should be favourable despite the loss incurred. Only then can it be potentially beneficial to continue with the investment plan. Ultimately, the returns you can potentially earn from your SIP investments should justify the risk you are comfortable taking.

6. Wait for a market recovery

If the risk-reward ratio is in your favour, you can consider holding your investments and waiting for the market to recover. In the meantime, you can even continue your SIP to benefit from rupee cost averaging in the falling market. This allows you to buy more units and simultaneously reduce the overall investment cost.

Conclusion

The bottom line is that it is not unusual for a SIP to go into a loss. It is more common than you expect, but for long-term investments in fundamentally strong companies, such short-term price variations may not have much of a negative impact.

If you are eager to start a SIP but do not know how much to invest to potentially earn the returns you seek, check out the mutual fund calculator on the Bajaj Finserv Mutual Fund Platform. This online tool can help you identify the optimal monthly SIP for your financial goals. Additionally, you can also choose from 1,000+ mutual fund schemes on this platform and start your investment journey online.

Essential tools for all mutual fund investors