There is a belief among long-time stock market investors about SIP that investing a small amount every month reduces the impact of market fluctuations. But recent data are calling this idea into question. Monthly SIPs in Nifty50 have given only 4.5% XIRR returns in last 5 years. This return is lower than many bank FDs.

As per ACE MF data, monthly SIP returns of Nifty50 were negative 4.6% in last 2 years and negative 10.5% in 1 year, ET reported. That is, investors who invested money in the Nifty50 every month during this period saw the value of their investment decline. SIP returns were 8.35% in 7 years and 9.44% in 10 years.

SIP does not always mean high returns

The advantage of SIP is that whether the market is up or down, the investor keeps investing a fixed amount every month. Because of this, more units are available when the market falls and less units are available when it rises. It is called rupee cost averaging.

But SIP is not a technique that can overcome stock market losses. If the performance of the index or fund remains poor for a prolonged period, SIP returns may also remain poor.

In a report by ET, Vikas Gupta, CEO and Chief Investment Strategist, Omniscience Capital said SIP is not magic. If the underlying index does not return, the SIP may not return either.

Midcap-Smallcap outperformed Nifty50

During this period, not all segments of the market performed equally. According to ACE MF data, the Nifty Midcap 150 has returned 14.89% in the last 5 years. While the return of Nifty Smallcap 250 TRI was 15.34%.

Even over a period of 7 years, both indices outperformed the Nifty50. Nifty Midcap 150 returned 19.22% and Nifty Smallcap 250 returned 20.64%.

It means that the problem was not uniform across the equity market. Compared to the Nifty50, which comprises large and established companies, the midcap and smallcap segments have outperformed during the period.

Why does the 5 year data look so weak?

Another big reason is that this period of 5 years carries with it the sharp upswing in the market after covid and the weakness that followed. Therefore, if the start and end dates change, the compensation figure can change significantly.

According to experts, between September 17, 2021 and September 17, 2024, the Nifty50 cumulative investment was returning around 14% CAGR, while during the same period, the monthly SIP returns were around 21%, but in the next two years, the market performance remained poor, which led to the figure falling for the entire 5 years.

According to him, there have been periods in history when the Nifty50 has given very little or almost zero returns for many years. However, it cannot be determined in advance when the market will pick up again.

Should I stop SIP in Nifty50 now?

It is not appropriate to decide to discontinue SIP based on this data alone. It is important for an investor to see what his goal is, what is the investment period and how much risk he can take.

According to Sorabh Gupta, head of equity, Bajaj AMC, equity returns do not stay the same every 5 years. Since 1999, the average 5-year rolling return of the Nifty50 TRI has been around 15% and returns were negative in only 0.07% cases.

This does not mean that Nifty50 will definitely give better returns in future. But this definitely shows that it is not appropriate to decide on the entire investment model by looking at a short or specific period in equity.

What should investors understand?

The biggest lesson from all this data is that SIP does not eliminate market risk. This is an investment method, not a strategy that offers guaranteed returns.

If an investor’s money is only in Nifty50, he should look at the entire portfolio according to his objective, investment duration and risk appetite. Closing SIP due to poor returns in last 1 or 2 years or investing money only in segments that have performed well in the past, both decisions should be taken wisely.

Equity returns over the long term depend on earnings, valuations, economic conditions and market fluctuations. So, the question is whether to continue SIP or not, but also in which index or fund to invest, for how long and for what purpose.