Market has fallen more than 19% (XIRR) in last 1 year and thy has almost eroded the three year returns (XIRR). There are 172 and 84 equity mutual funds out of 264 equity mutual funds which have under performed the BSE Sensex in last 7 months and 1 year many investors may have concerned about their SIP in equity mutual funds.
With the falling NAV an investor is getting more units of the scheme but is it necessary he should continue his SIP. To answer this question, he should find out the reasons for the fall.
There Was the investment in SIP as per risk profile of the investor? :
There are hundreds of equity mutual funds in the market, but an investor should choose a funds according to its risk profile. Equity mutual funds give higher returns but they also possess high risk. Thus, equity mutual funds are not a right investment for all investors, especially for the investors who cannot afford to lose their capital. So, an investor should invest in a fund which is marching his risk profile.Smaller AUM Funds have large expense ratio :
An investor should also consider the expense ratio while investing. Generally, the mutual funds which have higher AUM have low expense ratio. We can see from the below table that the diversified equity mutual funds which have AUM lower than Rs1,000 crore have higher expense ratio than the diversified equity mutual funds which have AUM higher than Rs1,000 crore.
Sectorial, group and company concentration :
An investor should check the concentration of investments in a sector of his mutual funds. A high sectorial concentration signifies that the mutual funds are exposed too much to a particular sector and there is a high possibility that the mutual funds will give poor returns if anything goes wrong with that sector. Similarly, a large percentage of investment in a group or a company also pose the concentration risk to the mutual fund. The share price of the company will plunge if anything happens wrong in that company which also pull the mutual funds NAV. Optimal diversification is a key to not lose money market and if someone breaks this he will pay the price. Thus, investors should avoid such mutual funds which have put too much money in one group or in one company.
Sortino ratio analysis required on the funds :
Sortino ratio signifies that the risk and reward ratio of funds. Higher the sortino ratio lower the possibility that fund will give negative return. So, one should look at the sortino ratio of the equity mutual fund before investing in it. In addition, he should periodically check the sortino ratio of the fund.
Conclusion :
An investor should find the reasons behind the fall in NAV of his mutual funds. He can continue to invest in a fund if the fund has fallen less than the market and its peers. But if the fund has fallen more than the market and its peers then he should look for the alternatives. An investor can reduce his losses by investing in direct plans since the expense ratio in direct plans is less than the indirect plans. In addition, an investor should invest in mutual funds according to his risk profile. He should also look at the sortino ratio of the fund.
Switch to direct plan :
To cut the losses, an investor can switch to direct plan. In indirect plans, the expense ratio is higher than the direct plan, generally 1-1.5%. An investor can cut the cost by switching to direct plan. Gaining 1-1.5 percent extra makes a significant impact in long-term. We can notice from the below table that an investor can make extra Rs 71,708 in 10 years by investing in the direct plan. The impact will be more magnificent if he keeps investing for a longer period, say 15-20 years.