Investors seeking to maximize returns through Systematic Investment Plans (SIPs) might be surprised to learn that constantly switching to the previous year’s best-performing index could backfire. A new study by WhiteOak Capital Mutual Fund suggests staying the course with a single index might be a more prudent strategy.
The study analyzed the performance (XIRR) of SIPs over a 19-year period (FY06-FY24). It compared two scenarios:
Sticking with one index: Investors consistently invested in a single index fund
Chasing performance: Investors switched their SIPs annually to the index that performed best in the previous year.
The results were clear: investors who stuck with a single index generally saw better returns compared to those who chased past performance.
The study by WhiteOak Capital Mutual Fund reveals that long-term investment continued in same mid cap or small cap index, since FY06, had higher XIRR as against annually switching to the best-performing . While Small Cap and Mid Cap indices have historically outperformed Large Cap indices over the past 19 years, there were periods where Large Caps took the lead. For example, SIPs in the Large Cap segment outperformed seven times, while SIPs in the Small Cap and Mid Cap segment each outperformed six times during this time frame. This reinforces the notion that market cycles are unpredictable, and sticking with a diversified index can offer stability.
Similarly, a SIP started in the Small Cap Index would have generated XIRR of 16.0% (as of 1 April 2024), as against 15.1% if changed annually.
Large Cap Index, Mid Cap Index and Small Cap Index are represented by Nifty 100 TRI, Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI respectively. 10 year rolling SIP return period is from 1 Apr 2005 to 1 Apr 2024 (i.e. first observation: 1 Apr 2015). Mean returns (calculated by taking mean of 10-year rolling returns between 01/06/13 and 30/05/23) for Sensex is 12.64% and for Nifty 50 is 12.93% (Source: AMFI)
As per the report from WhiteOak Capital Mutual Fund, ‘Staying on course’ on SIPs is better strategy than frequently changing lanes as frequently changing lanes can be both stressful and harmful. Therefore, investors should focus on reaching the ultimate financial goals by continuing SIP over the long term.
First Published: May 17 2024 | 3:47 PM IST