Nifty SIP return fails to beat even bank FD over 5 years: Is this the warning sign investors can’t ignore?

Reflecting how badly equities have fared as an asset class for largecap investors, a monthly systematic investment plan (SIP) in India’s bluechip index Nifty50 has delivered an XIRR of just 4.5% over the past five years, falling well short of even bank fixed deposit returns.

The weakness becomes more pronounced over shorter periods. The Nifty50 SIP return has been negative 4.6% over two years and negative 10.5% over one year, according to data from ACE MF. Over seven years, the return stands at 8.35%, while the 10-year return is 9.44%.

The underperformance, however, has not been uniform across the market. The Nifty Midcap 150 delivered 14.89% over five years, while the Nifty Smallcap 250 TRI returned 15.34%. Over seven years, the two indices gained 19.22% and 20.64%, respectively.

The divergence has left investors facing an uncomfortable reality: staying invested in equities has not necessarily translated into attractive returns if the exposure was concentrated in the Nifty50.

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“A negative two-year SIP return on the Nifty isn't a standalone buy signal, but it does show us that the high valuations of the earlier rally have come down significantly,” Praveen Ladia, chief executive officer at Karma Capital, told ET Markets.

Ladia said the recent correction had not been evenly spread across market segments, pointing out that midcap and smallcap indices had delivered returns of more than 9% as of August-end.

“Going forward, near-term returns will be less about where the index goes and more about identifying businesses that can beat earnings expectations while still being reasonably priced,” he said.

SIPs cannot overcome weak index returns

The recent performance also highlights the limits of systematic investing. SIPs help investors maintain discipline and average their purchase costs during market fluctuations, but they cannot generate returns if the underlying index remains stagnant or declines.

“SIP is not magic,” said Vikas Gupta, chief executive officer and chief investment strategist at OmniScience Capital. “SIP cannot generate returns when the underlying index itself has not generated returns.”

Gupta said the current five-year period began after the post-Covid rally and ended during a phase of market weakness, making it an unfavourable window for measuring equity returns.

From Sept. 17, 2021 to Sept. 17, 2024, Nifty 50 lump-sum returns stood at 14% CAGR, while monthly SIP returns were 21%, according to Gupta. The subsequent two-year period, however, has been flat for both lump-sum and SIP investors.

“In the past, too, Nifty50 has resulted in 0 returns over 6 years as well as even 10 years. But those are very rare occasions,” Gupta said.

According to him, such periods have typically been followed by strong returns, which help bring longer term performance closer to historical averages. He expects equities to significantly outperform fixed deposits going forward, although he cautioned that the timing of such a move cannot be predicted.

“Patience is required and allocations should be continued,” Gupta said.

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The weak recent returns do not necessarily invalidate the long-term case for equities. Sorbh Gupta, head of equities at Bajaj AMC, said equity returns could remain non-linear even over a five-year period because markets respond to economic growth, corporate earnings and valuations.

“Five-year rolling returns for the Nifty 50 TRI since 1999 have averaged around 15%, with only 0.07% of observations delivering negative returns,” he said.

The data, he added, reinforces the distinction between equities and fixed deposits. FDs generally offer predictable returns, while equities carry market risk and require a longer investment horizon.

“Recent underperformance does not necessarily indicate that equities will outperform going forward, but it can improve the risk-reward context,” Gupta said.

Following the strong market performance and elevated valuations seen in 2024, the subsequent consolidation has moderated some of the valuation excesses, he said. That has made valuations relatively more reasonable in several parts of the market.

Still, he cautioned investors against treating recent weakness as an automatic buy signal.

“The key, however, is to remain patient, maintain an appropriate investment horizon and avoid making decisions based solely on recent market performance,” he said.

Sunny Agrawal, head of fundamental retail research at SBI Securities, said returns often appear weak when measured after a prolonged period of correction or consolidation.

“The computation will look dramatically different if Nifty rallies 20% in the next 12 months,” he said.

Agrawal also pointed to the growing contribution of stocks outside the Nifty50. “There is no second thought that the majority of the wealth is getting generated beyond the Nifty50 universe,” he said, adding that the Nifty’s share of total market capitalisation has been persistently declining.

He attributed part of the largecap underperformance to persistent foreign institutional investor outflows, which he said were chasing the global artificial-intelligence boom. “Outperformance is clearly in mid, small and microcap packs and hence MF returns will also look far better in this category,” Agrawal said.

A correction in crude oil prices and the end of the AI boom could bring momentum back to largecaps, he added.

The data does not establish that the Nifty50 is certain to rebound. It does, however, show that the recent correction has reset returns and valuations across market segments unevenly.

For investors, the immediate lesson is that a five-year SIP horizon does not guarantee FD-beating returns, particularly when the investment period begins after a sharp rally and ends during a correction. SIPs provide discipline and averaging benefits, but they do not eliminate market risk.

The next phase could also be more dependent on earnings and stock selection than on a broad-based rise in the index.

“As earnings growth catches up, we expect the market to shift from a valuation-led phase to an earnings-led one,” Ladia said. “That’s exactly when fund manager skill in stock selection starts to matter more than the direction of the index.”

The warning for investors, therefore, may not be that equity has stopped working. It may be that index exposure, investment timing and patience matter more than the SIP label itself.