Should You Shift Every Year to Last Year’s Best-Performing Mutual Fund Schemes?

 If their returns are lower, there is a feeling of disappointment and a fear of missing out (FOMO) on the best performers. As a result, they redeem their existing investments and invest in the last year's best performers. Some investors may repeat this activity every year. Should you shift your investments every year to last year's best-performing mutual fund schemes? Is this a good investment strategy? Let us discuss this in detail.

Is Switching Investments To Last Year’s Best Performers A Good Strategy?

In May 2024, WhiteOak Capital Mutual Fund published a study. The study highlighted the returns that investors would earn in the following two scenarios:

1. Starting a SIP in the mid-cap index and continuing with it for 19 years (FY 2006 to FY 2024)
2. Starting a SIP in the mid-cap index and switching every year to the last year’s best-performing index for 19 years (FY 2006 to FY 2024)

During these 19 years, for the investor who switched every year to the last year’s best-performing index, the performance was as follows:

1. SIPs in the large-cap index outperformed seven times
2. SIPs in the mid-cap index outperformed six times
3. SIPs in the small-cap index outperformed six times

So, what were the overall returns for the two investors?

1. The investor who started a SIP in the mid-cap index and continued with it for 19 years earned a final XIRR of 18.1% (as of 1st April 2024)
2. The investor who started a SIP in the mid-cap index and switched every year to last year’s best-performing index earned a final XIRR of 15.5% (as of 1st April 2024)

The study highlighted that the investor who switched investments every year to the last year’s best-performing index got a lower XIRR than the investor who continued with the mid-cap index. 

Table: Mid-Cap SIP: Switching Every Year Vs Continuing

Note: The large-cap index is represented by the Nifty 100 TRI, the mid-cap index is represented by the Nifty Midcap 150 TRI, and the small-cap index is represented by the Nifty Smallcap 250 TRI.

In the above table, the section on the left side shows which index was the best-performing index in which year. The middle section shows how the first investor started investing with the mid-cap index and switched every year to the last year’s best-performing index. The section on the right side show how the second investor started investing with the mid-cap index and continued with it for 19 years.

Just like the above study, WhiteOak Capital Mutual Fund did another study. In this study, the two investors started by investing in the small-cap index.

1. The first investor started a SIP in the small-cap index and continued with it for 19 years (FY 2006 to FY 2024)
2. The second investor started a SIP in the small-cap index and switched every year to the last year’s best-performing index for 19 years (FY 2006 to FY 2024)

 So, what were the overall returns for the two investors?

1. The investor who started a SIP in the small-cap index and continued with it earned a final XIRR of 16.0% (as of 1st April 2024)
2.  The investor who started a SIP in the small-cap index and switched every year to last year’s best-performing index earned a final XIRR of 15.1% (as of 1st April 2024)

The study once again highlighted that the investor who switched investments every year to last year’s best-performing index got a lower XIRR than the investor who continued with the small-cap index.

Investors should continue with their investments in the same scheme rather than switching every year to last year’s top performers.

How Did The Previous Winners Fare In The Subsequent Years?

In a study, mutual fund schemes that were top performers over three years were analysed. They examined how these top-performing mutual fund schemes performed over the next three years. Here are the results.