Switching SIPs Annually? Here’s why you might be losing out
Opting to switch equity mutual fund schemes solely based on recent top performers may not be a prudent strategy, especially for investors utilizing systematic investment plans (SIPs). According to a study by Whiteoak Capital Mutual Fund, such sporadic switching across products often results in underperformance.
Analyzing mutual fund returns spanning the past 19 years, the study found that investors who initiated an SIP in a mid-cap or small-cap index fund in April 2005 and maintained their investment in the same category consistently earned higher returns compared to those who frequently switched SIPs annually based on the previous year’s best-performing category.
The cost of chasing returns
If an investor had initiated a systematic investment plan (SIP) in a mid-cap fund in April 2005 and subsequently switched to the top-performing fund of the previous year at the onset of each financial year until April 2024, they would have garnered an annualized return of 15.5% over the period. In contrast, an investor who maintained their investment in the mid-cap index fund throughout the entire duration would have realized a higher annual return of 18.1%.
Likewise, an investor commencing with a small-cap fund and switching annually would have achieved an annual return of 15.1%. Conversely, adhering to the small-cap index fund without switching would have resulted in a slightly higher annual return of 16%.
The pitfalls of performance chasing
Retail investors often gravitate towards recently successful schemes. Nonetheless, financial advisors warn that this approach can often lead to investing in trends that have already reached their peak, resulting in missed opportunities for maximizing returns.
For instance, consider an investor who follows this pattern: they commence a systematic investment plan (SIP) in a mid-cap index fund in April 2005, switch to a large-cap fund in April 2007, transition to a small-cap fund in April 2010, and subsequently return to a large-cap scheme in April 2011.
Historical performance insights
From April 2005 to April 2024, systematic investment plans (SIPs) focused on large-cap stocks, mirrored by the Nifty 50 TRI, secured the top performer position seven times. Conversely, SIPs in the small-cap sector, as denoted by the Nifty Smallcap 250 TRI, and in the mid-cap domain, represented by the Nifty Midcap 150 TRI, each claimed the leading position six times during the same period.
The verdict: Stay the course
The study unequivocally demonstrates that maintaining consistency within a chosen investment category, as opposed to shifting based on past performance, generally results in superior returns. This steadfastness enables investors to fully capitalize on the growth potential of their selected segment while avoiding the pitfalls associated with chasing performance.
