Stay on course! Avoid changing lanes frequently in SIP, says WhiteOak Capital Mutual Fund

It’s better to continue with the same index rather than annually switching a Systematic Investment Plan (SIP) to the previous year's best-performing index, revealed a study conducted by WhiteOak Capital Mutual Fund.

The study analysed the return (XIRR) of SIPs by comparing continuous investment in one index with SIPs that switch to the last year's best-performing index, over a period from FY06 to FY24.

The study observed that over the past 19 years, overall, SIPs in the Small Cap Index and Mid Cap Index have outperformed those in the Large Cap Index (as of April 1, 2024). However, during this period, SIPs in the Large Cap segment outperformed seven times, while SIPs in the Small Cap and Mid Cap segment each outperformed six times.

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Investors frequently based their decisions on the performance of index in the previous year. However, changing the lane and switching to a better-performing index every year does not often result in better investment performance, it cautioned.

The study observed that long-term investment continued in the same mid-cap or small-cap index, since FY06, had higher XIRR as against annually switching to the best-performing index of the previous year.

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An investor who had continued SIP with the Mid Cap Index only without changing to the best-performing index of the previous year would have generated an XIRR of 18.1 percent (as of 1 April 2024) as against 15.5 percent if annually changed to the best-performing index of the previous year. The table here shows returns when continued with one index, as against changing regularly every year for the last nineteen financial years, it mentioned. 

Similarly, a SIP started in the Small Cap Index would have generated an XIRR of 16.0 percent (as of 1 April 2024), as against 15.1 percent if changed annually, further noted the study.

Moreover, Looking at the 10 Years Rolling SIP Return, the average XIRR for SIP continued in Mid Cap Index is 16.6 percent, as against XIRR of 14.5 percent for investors who started SIP in Mid Cap Index and switched based on the previous year's best-performing index. Similarly, the average XIRR for SIP continued in the Small Cap Index is 14 percent, as against 13.9 percent if switched based on the previous year's best-performing index, it pointed out.

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Past performance may or may not be sustained in the future and is not a guarantee of any future returns. Index performance does not signify scheme performance, highlighted the Study.

As per the report from WhiteOak Capital Mutual Fund, ‘staying on course’ on SIPs is a better strategy than frequently changing lanes as it can be both stressful and harmful. Therefore, investors should focus on reaching the ultimate financial goals by continuing SIP over the long term.

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One must note that the calculations given do not consider stamp duty/levy etc. for ease of calculation and the values shown are pre-tax. Investors may incur tax liability on capital gains based on prevailing tax laws. Any calculations made are approximations meant for understanding a particular concept only. These calculations/views alone are not sufficient and should not be used for developing or implementing an investment strategy. Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

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