Switching SIPs Annually? Here’s why you might be losing out

Switching equity mutual fund schemes based on recent best performers may not be a rational thing to do when you invest via systematic investment plans (SIPs). A study conducted by Whiteoak Capital Mutual Fund revealed that occasional switching across products leads to underperformance. 

Having analysed the mutual fund returns over the past 19 years, the study revealed that investors who started an SIP in a mid-cap or small-cap index fund in April 2005 and remained in the same category earned higher returns than the one who switched SIPs every year based on the previous year's best-performing category.

The cost of chasing returns

An investor who began an SIP in a mid-cap fund in April 2005 and switched to the previous year's best-performing fund at the start of each financial year until April 2024 would have achieved an annualised return of 15.5% over the period. Conversely, an investor who stayed invested in the mid-cap index fund for the entire duration would have earned 18.1% annually. 

Similarly, an investor who started with a small-cap fund and switched each year would have earned an annual return of 15.1%, whereas remaining in the small-cap index fund would have yielded 16% per year.

The dangers of performance chasing

The retail investor targets the latest performing schemes. Financial planners recommend that this usually invests in trends after they have peaked and, thus, opportunity is lost in reaching maximum returns.

For example, an investor chasing this trend might have started an SIP in April 2005 in a mid-cap index fund. He would then have shifted to a large-cap scheme in April 2007 and then to a small-cap scheme in April 2010 and thereafter back again to a large-cap scheme in April 2011.

Historical performance insight

The period between April 2005 and April 2024 saw the large-cap segment SIPs, as reflected in the Nifty 50 TRI, being the leaders seven times. The Nifty Smallcap 250 TRI reflected small-cap segment SIPs while the Nifty Midcap 150 TRI reflected the mid-cap segment SIPs. Both emerged as leaders six times during this period.

Verdict: Stay the course

It goes without saying that an investor, by sticking with a chosen investment category rather than switching based on past performance, tends to garner better returns. It is this consistency that enables investors to fully benefit from the growth potential within their chosen segment without falling prey to performance chasing.