Think before you 'Switch' your SIP!

New Delhi: When people don’t achieve returns as expected from their investments, they want to change their investment plans. No one wants their money stuck at places of negative return. However, investors sometimes do make mistakes. Why is it a mistake? Why do investors continue to invest in places where they are not getting returns?

Let’s understand it-

If you invest in mutual funds, it’s quite easy to change. For instance, if you are investing in Scheme A which hasn’t performed well in the last 6 months, you can stop your monthly SIP in that scheme and start investing in Scheme B or C. When you switch from one fund to another, it’s called a switch. This means investors change their SIP based on better performance seen in another fund. However, changing investments in this way has a negative impact on your overall return.

Whiteoak Capital Mutual Fund has conducted a study from the financial year 2005-06 to 2003-24, which is a time period of 19 years. It was found that investors who started SIP in mid-cap or small-cap index funds in April 2005 and continued in the same category received higher returns compared to those who switched their SIP to funds performing best each year.

The report states that investors who invested in mid-cap index funds and kept them active received an 18.8 percent CAGR return. The return on changing the index repeatedly remained 15.5 percent. Similarly, if an investor started SIP in small-cap index and made no changes, they received a 16 percent return, while changing the index resulted in a 15.1 percent return.

Certified Financial Planner Nisha Sanghvi says there is no wisdom in constantly switching SIPs based on index performance. Switching investments from one fund to another incurs exit loads and capital gains tax. Increasing costs reduce your return. If your fund is not performing well for a short period in a long-term investment, be patient.

According to experts, mutual fund investments should not be reviewed frequently. Review once a year. Compare your scheme with its benchmark. Only switch if your scheme is not performing well in the long term.

Things to remember-

Never stop SIP during market downturns. You get more units during a downturn. This increases your return in the long run. During market downturns, averaging the cost of rupees performs best. Instead of stopping SIP during downturns, you should increase your investment.

In this way, rather than switching SIP based on past performance, better returns can be obtained by staying in the same fund for a long period. Avoid switching SIPs frequently. Stay invested in your chosen fund for the long term.