SIP or lump sum? Tough Choice for Mutual Fund Investors

However, the ‘average rupee cost’ advantage of SIPs also made them attractive to lump sum earners; For example, someone sold property or got a bonus at work.

Staggering your investments through SIP or Systemic Transfer Plan (STP) can give you better returns than lump sum investment in certain situations.

In this piece, we’ll look at what past data has to say about this topic.

An STP is similar to a SIP as it invests in equity markets by redeeming a fixed amount every month from debt mutual funds. Therefore, we will consider SIP and STP to be interchangeable for the purposes of this article.

The short answer is that a SIP performs better than a lump sum investment in equities when there is a long downtrend in the market followed by a recovery. A recovery after an upward trending market or even a small sharp correction is not in line with the SIP.

Let’s improve covid. If you have invested lump sum 12,000 on 1st April 2020, a date that was close to the market bottom, you would have ended up with 21,798 as on 1st April 2021. Same investment in 12 months in installments of staggering 1,000 you must have just got 15,900, as per Morningstar SIP calculator.

The COVID reform was simply too short and fast to capture a SIP efficiently. Results vary if improvement is prolonged.

Investing a lump sum on December 1, 2007, near the peak of 2003-07, the bull market would have seen your lump sum beaten up to 12,000 5,542 as on 1 December 2008.

On the other hand, a SIP would have minimized the downside. 7,105. By 1 December 2009 the market had recovered. SIP of two years 1,000 must have seen your 24,000 to increase the amount invested 30,389 while lump sum stays low at 24,000 21,285.

Data crunched by QED Capital shows similar results. QED Capital observed monthly rolling returns for lump sum vs SIP on Nifty 50 index. Results show that SIPs outperform lump sums in less than a third of the time. One year SIP outperforms lumpsum 27% of the time while two year SIP outperforms lumpsum 28% of the time. However, SIPs provide psychological comfort to investors who may be worried about investing during market peaks and can help anxious investors stay the course for a longer period.

Some financial experts prefer hybrid funds to systematic investment plans as a means of controlling risk.

“I would say, focus on the destination and not the bumps in the journey. For someone with a time frame of 10 years, expect the market to exceed the starting point. Hence, lump sum will almost always do better than a SIP. If you have low risk appetite, short time horizon or valuation concerns, a hybrid fund is a better way to control lump-sum risk. SIPs are primarily for salaried people and not for lump sum deployment,” said Harshvardhan Roongta, joint chief executive, Rungta Securities, a mutual fund distributor.

However, hybrid funds may not be the best product for an investor who wants pure equity experience.

“I don’t think hybrid funds are a good option for a client who wants to build a pure equity corpus but is intimidated by the current valuation. Hybrid funds will not give you the equity experience for many years.” Vishal, Founder, Plan Ahead Wealth Advisors It will give you low returns with less risk, said Dhawan.

“If you consider a period of five or 10 years, the trend of lump-sum for better performance is likely to be less. So, I would say that from a psychological and practical implementation point of view, go for SIP or STP,” QED Anish Teli, founder of Capital, said.

QED used IRR in its analysis to compare SIPs versus lump sums. But it ignores the effect of interest earned by the bank account or debt fund from which the SIP or STP is done. However, given the short time period and low interest rate environment, the impact is modest.

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Statistically speaking, the odds stack heavily against a SIP beating outright. However, the psychological and emotional comfort of a staggered approach is very real.

When corrections come, SIPs automatically capitalize on them and take the sentiment out of market entry and exit. A smooth and low-stress investing journey can more than make up for the loss of some extra return. However, it is an option for each investor to choose from.