Should you continue your mutual fund SIPs during a market correction? Here is what investors should know

A mutual fund SIP is a method of investing money regularly in a mutual fund, usually through a fixed instalment. It matters because investments are spread across different market levels instead of being made all at once. This can make market timing less important, although it cannot prevent losses when equity prices fall.

For example, an investor contributing the same amount buys fewer units when a fund’s NAV is high and more units when its NAV is low. The investment therefore purchases varying numbers of units over time. The total result depends on the fund’s performance and the prices at which each instalment was invested.

SIPs are popular in equity funds for long-term investing, but they can also be used with hybrid and other mutual fund categories. During weak or range-bound markets, the benefit of buying at different NAVs may take time to appear. Regular investing is not a guarantee of positive returns.

The Nifty has fallen around 13% from its September-end 2024 level. This matters for SIP investors because equity mutual funds are linked to market prices. Regular investing spreads purchases across levels, but it does not protect the accumulated portfolio from a broad market decline.

Suppose earlier SIP instalments bought units when valuations were high. If the market subsequently falls, the current value of those units can drop below their purchase cost. New instalments will buy more units at lower prices, but those purchases may not immediately offset losses on older instalments. The overall SIP return can therefore remain muted or negative.

The article describes prolonged equity weakness as the reason recent SIP returns have moved into the red. The benefit of lower purchase prices may take time to show, particularly when markets remain weak or move within a narrow range. A recovery would be needed for accumulated lower-cost units to help returns improve.

An equity SIP can show negative returns because every instalment is exposed to the fund’s market value after purchase. SIPs spread investments across market levels, but they cannot shield investors from equity market falls. If the market declines after several purchases, the portfolio’s current value may be below the amount invested.

For example, earlier instalments may have bought units when the fund’s NAV was high. Later instalments buy more units when the NAV is lower, but the newer purchases do not erase the decline in the earlier units. The accumulated result depends on all purchase prices and the current NAV. A short measurement period can therefore show a loss.

Negative returns over short periods are not automatically a reason to stop investing. Investors should also check whether the weakness reflects the broader market or whether the fund has underperformed its benchmark and peers over comparable periods. The article stresses that lower prices may need time to benefit long-term investors.

Continuing an equity SIP during a correction can increase the number of units bought with each instalment. This happens because a lower NAV means the same investment amount purchases more units. The approach matters for long-term investors because those additional units may participate in a future market recovery.

For example, a fixed instalment buys fewer units when a fund’s NAV is high and more units after the NAV falls. The investor is still investing the same amount, but the unit count changes. This is the rupee-cost-averaging effect described in the article. It is more noticeable in volatile markets, where NAVs vary more between instalments.

The strategy does not guarantee gains or prevent further losses. Markets can remain weak or range-bound, so the benefit may take time to appear. The article advises long-term investors not to stop solely because markets fall, while recognising that investors must be able to withstand further declines and prolonged weak returns.

An investor should consider increasing SIP contributions during a decline only after checking whether the larger commitment fits their finances and plan. Lower NAVs can make additional purchases attractive, but market weakness can continue. The decision should therefore be based on more than the hope of buying at a bargain.

The article identifies four checks: available savings, financial goals, asset allocation and the ability to withstand further market declines or prolonged weak returns. For example, an investor with surplus savings and a suitable long-term equity allocation may be able to increase contributions. Someone without sufficient savings or with a near-term goal may not be able to do so safely.

The key implication is that a falling market changes purchase prices, not an investor’s financial capacity. Increasing contributions is optional, not a required response to a correction. Investors should first confirm that the revised SIP remains consistent with their goals and risk tolerance before committing more money.

Poor SIP returns do not automatically mean a fund is performing badly. Equity markets can weaken broadly, pulling down many funds at the same time. Investors need to distinguish this market-wide effect from a fund-specific problem before deciding whether changes are necessary.

The practical method is to review the scheme’s returns against its benchmark and its peers over comparable periods. For example, if the fund and similar funds have declined broadly in line with the benchmark, market weakness may be the main explanation. If the fund has lagged both its benchmark and comparable peers, that may indicate underperformance specific to the scheme.

This comparison should be interpreted over matching periods rather than isolated short-term results. The article does not suggest stopping a SIP solely because returns are temporarily negative. Instead, it recommends examining relative performance while recognising that corrections can keep investments made at higher levels in the red.

A mutual fund’s NAV, or net asset value, is the value assigned to one unit of the fund. It matters in an SIP because the instalment is converted into units using the NAV applicable when the investment is processed. The NAV therefore determines how much of the fund an instalment purchases.

For example, a Rs 1,000 instalment at an NAV of Rs 20 buys 50 units. At an NAV of Rs 10, the same instalment buys 100 units. The investor contributes the same amount, but the unit count changes with the fund’s price. This is the mechanism behind rupee-cost averaging, which becomes more noticeable when NAVs vary in volatile markets.

A lower NAV can help an investor accumulate more units, but it does not guarantee a gain. If markets remain weak or range-bound, the benefit may take time to appear. The article also notes that SIPs can be used across equity, hybrid and other mutual fund categories.