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
- 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.
- 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.
- 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
- 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
- Secularly Increasing ( Your exit was at higher levels and in general market went up in the period)
- 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.
- Birla Sunlife Frontline Equity Fund
- Quantum long term equity fund
- SBI Bluechip fund
- SBI Magnum multi-cap fund
- 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.
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
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 .
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.
STP with a Liquid Fund
|Month||Interest Earned||Closing Balance|
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
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.
- 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
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.
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
Here are my key observations
- There is zero probability that Sensex will give zero negative returns over any 12 year period
- Only once it has happened that over 10 years Sensex has given negative returns the period was 1992-2002 because of Harshad Mehta scam
- Over 10 Years your average return was in the range of 17 %
- There were only 6 instances when the market was down for consecutive 3 years.
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 .