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Business News/ Mutual Funds / Switching SIPs Annually? Here’s why you might be losing out

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

Switching mutual fund schemes based on recent top performers via SIPs may lead to underperformance. A study by Whiteoak Capital Mutual Fund showed that sticking to mid-cap or small-cap index funds without switching yielded higher returns over 19 years.

This is why switching SIPs may not be a great idea for you Premium
This is why switching SIPs may not be a great idea for you

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 pitfalls of performance chasing

Retail investors frequently target the most recently successful schemes. However, financial planners caution that this strategy often results in investing in trends that have already peaked, leading to missed opportunities for optimal returns. 

For example, an investor following this pattern might have started an SIP in a mid-cap index fund in April 2005, switched to a large-cap fund in April 2007, moved to a small-cap fund in April 2010, and then returned to a large-cap scheme in April 2011.

Historical performance insights

Between April 2005 and April 2024, SIPs in the large-cap segment, as represented by the Nifty 50 TRI, emerged as the top performers seven times. Meanwhile, SIPs in the small-cap segment, indicated by the Nifty Smallcap 250 TRI, and in the mid-cap segment, represented by the Nifty Midcap 150 TRI, each claimed the top spot six times.

The verdict: Stay the course

The study clearly illustrates that sticking with a chosen investment category, rather than switching based on past performance, tends to yield better returns. This consistency allows investors to benefit fully from the growth potential of their chosen segment without falling into the trap of performance chasing.


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Published: 16 May 2024, 05:17 PM IST
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