Early underperformance need not be a reason for investors to exit their mutual fund SIPs. Data from the past 20 years shows that seven out of 10 five-year SIPs delivered double-digit annualised returns even when markets experienced weak or negative returns during the first two years, according to a report by ShareMarket by PhonePe.
The report further highlighted that analysing two decades of data ending June 2026 reassures investors that the short-term SIP sluggishness experienced recently is not uncommon, and extending the investment horizon can drastically improve outcomes.
Also Read | MF Tracker: HSBC Midcap Fund turns Rs 10,000 SIP to over Rs 2 crore, emerges 3-year topper with 24% return
Over the past 20 years, two-year annualised SIP returns in the Nifty 500 TRI have fallen below 5% on more than 25% of occasions. If an investor's SIP generated negative returns in the initial two years, continuing for a total of five years reduced the likelihood of losing money to zero. In nearly 69% of these cases, the 5-year annualised return rebounded into double digits.
The report further highlighted that extending the SIP for three more years (after the initial two years of dismal performance) allowed the Rupee Cost Averaging mechanism to work its magic.
For the cohort that started with negative returns after the initial two years, a massive 53% of occurrences eventually delivered an annualised return of between 15% and 20%. More importantly, the returns have never been negative for these investors if they continued their SIP till year five.
Investors who saw marginal 0% to 5% returns early on, always ended up with annualised returns above 5% if they continued their SIP for five years. In nearly 72% of these scenarios, returns jumped into double digits.
Anyone who had done an SIP in the market for seven or 10 years historically reduced capital loss risk to absolute zero. Over a 10-year period, SIPs delivered double-digit returns roughly 90% of the time.
While a 5-year SIP can sometimes yield blockbuster returns of >20% (nearly an 8% probability), a 10-year SIP strips away such extremes. By year 10, a massive 65% of the times the SIP returns have fallen strictly within the 10% to 15% return band. When combined with the 15% to 20% band (26%), a 10-year SIP has historically had a 90% probability of delivering double-digit annualised returns.
“With recent market cycles, it is natural for investors to worry about short-term sluggishness in their mutual fund SIPs. However, our study of SIP performance over the past two decades reinforces that the early years of a SIP do not dictate its final outcome,” said Nilesh D Naik, Head of Mutual Funds at PhonePe.
Naik further said that by extending their investment horizon, investors allow the true power of compounding to take over. Furthermore, by evaluating funds on our CRISP parameters of Consistency, Risk, and Investment Style, we believe investors can build resilient portfolios that deliver reliable, long-term success.
Also Read | IEX shares rise 2% after electricity trading volume jumps 20% YoY to hit record high in August
The report also highlighted that mutual fund SIPs in equities are not two-year products. They are structural wealth-building tools designed for longer horizons with patience. Judging an SIP's success or failure by its 24-month performance is like judging a marathon runner by their pace in the first mile.
When critics label SIPs and mutual funds to be a "scam" during temporary downturns, staying rational is essential. Extending your time in the market isn't meant to remove all risk, but it drastically lowers the chance of failing to beat inflation.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message ET Mutual Funds on Facebook/Twitter. We will get them answered by our panel of experts. Do share your questions at [email protected] along with your age, risk profile, and Twitter handle
