Is It Better to Switch to the Best-Performing Index Every Year in a SIP?
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Investors often wonder whether switching their Systematic Investment Plan (SIP) to the best-performing index each year could yield better returns. Let’s explore this with reference to the detailed SIP study conducted by WhiteOak Capital Mutual Fund.
Successful SIP: The Smart Investor’s Choice!
A successful SIP is more about “Starting Early”, maintaining the discipline of “Investing Regularly”, investing for the “Long Term” to achieve our “Financial Goals” and less about “Which Date”, “Which Frequency”, “At what stage of the Market Cycle” etc.
Case Studies: Switching vs. Staying Invested
The study examined two hypothetical investors:
Investor A: Started a SIP in the Mid Cap Index but switched annually to the previous year’s best-performing index.
Investor B: Continued investing only in the Mid Cap Index without switching.
Results from the Study:
Mid Cap Index Case Study (10-Year Rolling Returns)
| Metric | Switched Index (Investor A) | Continued Mid Cap Index (Investor B) |
| Average Return (% XIRR) | 14.7% | 16.7% |
| Maximum Return (% XIRR) | 20.7% | 21.5% |
| Minimum Return (% XIRR) | 3.9% | 5.8% |
Small Cap Index Case Study (10-Year Rolling Returns)
| Metric | Switched Index (Investor A) | Continued Small Cap Index (Investor B) |
| Average Return (% XIRR) | 14.0% | 14.1% |
| Maximum Return (% XIRR) | 20.1% | 20.4% |
| Minimum Return (% XIRR) | 2.8% | 0.0% |
Key Takeaways:
1. Higher Consistency in Staying Invested:
Investors who stayed invested in one index experienced more consistent returns than those switching indices frequently.
2. Cost of Frequent Switching:
Annual switching can lead to missed opportunities due to timing mismatches and delayed compounding benefits.
3. Psychological Stress of Switching:
Frequent switching can cause unnecessary stress and over-trading, which might reduce long-term returns.
4. Data Insight:
In both case studies, sticking to a single index provided better or comparable returns with less hassle.
Conclusion:
The data clearly suggests that frequent switching does not guarantee superior returns. Instead, it can cause more harm due to potential delays, market timing errors, and reduced compounding. Investors should focus on a long-term SIP strategy aligned with their financial goals rather than chasing the best-performing index annually.
The Best Strategy: Stay invested with discipline, trust the power of compounding, and avoid timing the market!
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