SIP or Lumpsum Investments. Which is better?

(Last Updated On: September 8, 2016)

What is SIP :

SIP stands for Systematic Investment plan. SIP is nothing but a periodic way of investing in mutual funds instead of investing everything in one go or lump sum as it is commonly called.

One of the most important questions I get from friends, clients, and bodhik users is  a variant of the following

I have  Rs X now to invest should I make a lump sum investment or  invest using a SIP?

While my intuitive answer is to quickly say SIP rather a version of SIP called STP if you have spare funds to invest .I thought it would be worthwhile exploring if Lump sum investments can be better in some scenarios

Before we start the analysis let’s summarize much-touted  benefits of SIP investment

Benefits of SIP investments

  1.  Creates Investment discipline:  Discipline is the most important and most overlooked facet of successful investment planning, you can  get the best possible investment advice but without a disciplined execution it will not work.
  2.  No need to time the market : Timing the market is something everyone wants to do but few can accomplish it . SIP takes away this headache from you.
  3. Averaging your purchase price  : Markets tend to go up and down , regular SIPs help you average the cost of your assets and hence take advantage of low points in the market
  4. Super Convenient : SIPs are a super convenient way to invest, you can give instructions and monthly your money can move

So now that we know the benefits of SIPs. Let’s use some data to see what happens in real scenarios

We are going to look at 2  different scenarios to start with

  1. Secularly Increasing ( Your exit was at higher levels and in general market went up in the period)
  2. Secularly Decreasing ( Your exit was at low and in general market decreased in the period)

Before we go and look at these scenarios, Let’s pick up few funds for our analysis. I am going to choose the following funds for the analysis.

  1. Birla Sunlife Frontline Equity Fund
  2. Quantum long term equity fund
  3. SBI Bluechip fund
  4. SBI Magnum multi-cap fund
  5. Franklin India Prima Fund

Why did I choose these funds

  • They are amongst the top performing funds in respective fund categories
  • They represent a cross-section of important  fund types ( like large cap, mid cap and diversified)
  • We will be able to gauge impact vis-a-vis different benchmark indexes.
READ  ELSS vs PPF vs ULIP : Features and Comparison

Secularly Increasing

Below is the summary of key data points we took for this analysis

  • Time period was chosen Sept 2011 to Aug 2016 ( 5 Years, 60 Months)
  • Total Investable Amount= 1200000
  • Monthly SIPs= Rs 20,000
  • Number of SIP in 5 years =60
  • Lumpsum money invested in the fund =1200000

This is how the various indices looked like in this period, in general, this was a period of secular growth and hence everything was up

Secular Growth ( Sepr-2011-Aug 2016)

How did SIP and Lumpsum investments perform

Let’s look at how investment values of these funds change, the table below summarizes the value for both SIP and Lump sum scenario, we have taken  the 5-year return for these funds to calculate Investment value for Lump sum mode .

SIP Versus Lumpsum

It’s very clear that if you invest lump sum, you would have much higher returns reason being simple maths with secular positive returns you tend to accumulate higher profits as your money is invested for longer period

But wait this story is not complete, you would be thinking by now if I had 12 lacs at the beginning of the period as I invest in SIPs, I will not be keeping my money idle, but I will be investing it somewhere, so we need to bring that into the equation, so here is what we can do to solve this problem , we assume that you put all this money in liquid funds ( low risk and consistent returns) at the beginning of the period and then give an STP ( Systematic Transfer plan) instruction to do monthly SIPs from that fund.

SIP with STP Plan

As discussed above at the beginning of the period , we take the following call

Total Investments in Liquid funds = 1200000

Monthly SIP =20,000

Number of SIPs= 60

Liquid Fund return ( assumed) = 8%

So at the end of 5 years, we will have a corpus which comes from SIP as shown in the table above plus the income we will earn from exposure in liquid funds, Table below provides the monthly cash flows for 5 years using Liquid fund based STP.

READ  ELSS vs SIP : Difference between ELSS and SIP

STP with a Liquid Fund

Month Interest Earned Closing Balance
180001188000
279201175920
37839.46666666671163759.4666667
47758.39644444441151517.8631111
57676.78575407411139194.6488652
67594.63099243461126789.2798576
77511.92853238411114301.20839
87428.67472261101729.8831126
97344.86588741741089074.749
107260.49832666681076335.2473267
117175.56831551131063510.8156422
127090.07210428131050600.8877465
137004.00591830991037604.8936648
146917.36595776531024522.2596226
156830.14839748371011352.40802
166742.3493868003998094.75740684
176653.9650493789984748.72245622
186564.9914830415971313.71393926
196475.4247595951957789.13869886
206385.260924659944174.39962351
216294.4959974901930468.895621
226203.1259708067916672.02159181
236111.1468106121902783.16840242
246018.5544560162888801.72285844
255925.3448190563874727.0676775
265831.5137845166860558.58146201
275737.0572097467846295.63867176
285641.9709244784831937.60959624
295546.2507306416817483.86032688
305449.8924021792802933.75272906
315352.8916848604788286.64441392
325255.2442960928773541.88871001
335156.9459247334758698.83463474
345057.9922308983743756.82686564
354958.378845771728715.20571141
364858.1013714094713573.30708282
374757.1553805522698330.46246338
384655.5364164225682985.9988798
394553.239992532667539.23887233
404450.2615924822651989.50046481
414346.5966697654636336.09713458
424242.2406475639620578.33778214
434137.1889185476604715.52670069
444031.4368446713588746.96354536
453924.9797569691572671.94330233
463817.8129553489556489.75625768
473709.9317083845540199.68796606
483601.3312531071523801.01921917
493492.0067947945507293.02601396
503381.9535067598490674.97952072
513271.1665301382473946.14605086
523159.6409736724457105.78702453
533047.3719134969440153.15893803
542934.3543929202423087.51333095
552820.5834222063405908.09675316
562706.0539783544388614.15073151
572590.7610048767371204.91173639
582474.6994115759353679.61114797
592357.8640743198336037.47522228
602240.2498348152318277.7250571

At the end of 5  years we will generate Rs 318,278 of free cash through the STP mode, so your total Investment value at the end of 5 years is shown in the table below

STP versus Lumpsum- Secular Growth

If you see Lumpsum mode still outperforms STP mode though the difference has reduced for all the funds, but still lumpsum scores over SIP for all the funds.

Which brings us to our primary insight

Basically if you are investing for long term Lump sum might not be a bad decision in economies and markets which are expected to grow secularly.

Secularly Decreasing

  • Time period chosen Jan 2008 to Dec 2008 ( 1 Year,12 Months)
  • Total Investable Amount= 2400,00
  • Monthly SIPs= Rs 20,000
  • Number of SIP in 1 years =12
  • Lumpsum money invested in the fund =240,000

This is how the different indexes looked like in this period

Secular decline( Jan-2008- Dec-2008)

STP versus Lumpsum- Secular decline

Now looking at STP versus Lumpsum for a secularly decreasing marketing it’s very easy to make out that SIP reduces your downside in a decreasing market and reduces it significantly.

READ  Confused on which mutual funds to invest in ? Here is your Step by Step guide to chose Mutual Funds in India

If you look at markets secular downtrends are rare for long periods, rarely markets stay down for long period of times what is that time frame, to arrive at some answers I looked at market returns from 1979 to 2003 about 34 years, below is the summary of how markets performed

Sensex Returns since 1979

Here are my key observations

  1. There is zero probability that Sensex will give zero negative returns over any 12 year period
  2. Only once it has happened that over 10 years Sensex has given negative returns the period was 1992-2002 because of Harshad Mehta scam
  3. Over 10 Years your average return was in the range of 17 %
  4. There were only 6 instances when the market was down for consecutive 3 years.

Conclusion

So here are my recommendations

1.Essentially what we are getting to is if your investment horizon is very long more than 10 years Lump sum investments can help you grow faster.

2. When your investment horizon is short (< 5 years) SIPs will serve you better to move through volatile markets

3. Between 5 years and 10 Years I am not very sure, but would go with SIP because of other benefits which i discussed earlier

4. If you have large money to invest  use STP ( systematic transfer plan) instead of simple SIP  it will grow your money faster .

 

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  • Very useful for beginners.
    Thank You.

    Sameer Wadhavkar 1 year ago Reply


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