Why Frequent Switching of SIPs Should Be Avoided?

Systematic Investment Plans (SIPs) have emerged as a disciplined and effective approach to wealth creation. However, recent data from the Association of Mutual Funds in India (AMFI) reveals a concerning trend—SIP stoppage ratios have surged to near-record levels. In November, the stoppage ratio rose to 79.12%, the 3rd-highest level ever recorded, reflecting investor anxiety amid market corrections. But does stopping or frequently switching SIPs truly address these concerns? This article explores why frequent switching of SIPs should be avoided.

Current Trends in SIP Stoppages

AMFI data highlights a sharp decline in new SIP registrations—49 lakh in November, down from 63.7 lakh in October. Simultaneously, SIP discontinuations rose to 39.14 lakh, pushing the stoppage ratio to 79.12%. Such trends suggest a reaction to market volatility. However, halting or frequently shifting SIPs may undermine long-term financial goals.

When Is It Okay to Stop an SIP?

Stopping an SIP should only be considered under the following circumstances:

• Underperformance: Evaluate whether the underperformance is due to temporary market trends or structural issues in the fund. A structural problem justifies exiting the SIP.
• Fundamental Changes: Changes in the fund’s objectives, strategy, or risk-reward profile may make it unsuitable for an investor’s portfolio.
• Risk Appetite Shift: Investors with a reduced risk appetite may need to reconsider their SIP allocation.

When Not to Stop an SIP?

Market downturns should not prompt SIP stoppages. In fact, market corrections can be advantageous:

• Rupee-Cost Averaging: SIPs buy more units when prices fall, enhancing long-term returns.
• Recovery Gains: Markets are cyclical, and SIPs are designed to weather short-term fluctuations for long-term growth.

Risks in Frequent Switching of SIPs

1. Reversion to Mean

Investment styles perform differently in various market phases. For example:

• Quality-focused funds performed well between 2019 and 2021.
• Value-oriented funds gained prominence afterwards. Switching SIPs frequently may cause investors to exit funds just before they recover and enter others that may soon underperform.

2. Higher Transaction Costs and Exit Loads

Frequent switches can lead to additional costs:

• Exit Loads: Exiting funds within a short duration can attract charges.
• Taxes: Short-term capital gains tax applies to equity funds held for less than a year.
• Re-entry Fees: Starting a new SIP may involve charges.
• Example: An investor exiting a SIP within a year could face an exit load and short-term capital gains tax, eroding overall returns.

3. Loss of Time in Building Wealth

Switching SIPs resets the investment timeline, delaying compounding benefits:

• Compounding Delays: Frequent exits interrupt compounding, reducing long-term growth potential.
• Performance Chasing: Investors chasing recent performers often switch to funds that subsequently underperform, leading to suboptimal returns. 
• Example: An average-performing fund held consistently can outperform a strategy involving frequent switches into so-called ‘star funds.’

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully