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.

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

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
1	8000	1188000
2	7920	1175920
3	7839.4666666667	1163759.4666667
4	7758.3964444444	1151517.8631111
5	7676.7857540741	1139194.6488652
6	7594.6309924346	1126789.2798576
7	7511.9285323841	1114301.20839
8	7428.6747226	1101729.8831126
9	7344.8658874174	1089074.749
10	7260.4983266668	1076335.2473267
11	7175.5683155113	1063510.8156422
12	7090.0721042813	1050600.8877465
13	7004.0059183099	1037604.8936648
14	6917.3659577653	1024522.2596226
15	6830.1483974837	1011352.40802
16	6742.3493868003	998094.75740684
17	6653.9650493789	984748.72245622
18	6564.9914830415	971313.71393926
19	6475.4247595951	957789.13869886
20	6385.260924659	944174.39962351
21	6294.4959974901	930468.895621
22	6203.1259708067	916672.02159181
23	6111.1468106121	902783.16840242
24	6018.5544560162	888801.72285844
25	5925.3448190563	874727.0676775
26	5831.5137845166	860558.58146201
27	5737.0572097467	846295.63867176
28	5641.9709244784	831937.60959624
29	5546.2507306416	817483.86032688
30	5449.8924021792	802933.75272906
31	5352.8916848604	788286.64441392
32	5255.2442960928	773541.88871001
33	5156.9459247334	758698.83463474
34	5057.9922308983	743756.82686564
35	4958.378845771	728715.20571141
36	4858.1013714094	713573.30708282
37	4757.1553805522	698330.46246338
38	4655.5364164225	682985.9988798
39	4553.239992532	667539.23887233
40	4450.2615924822	651989.50046481
41	4346.5966697654	636336.09713458
42	4242.2406475639	620578.33778214
43	4137.1889185476	604715.52670069
44	4031.4368446713	588746.96354536
45	3924.9797569691	572671.94330233
46	3817.8129553489	556489.75625768
47	3709.9317083845	540199.68796606
48	3601.3312531071	523801.01921917
49	3492.0067947945	507293.02601396
50	3381.9535067598	490674.97952072
51	3271.1665301382	473946.14605086
52	3159.6409736724	457105.78702453
53	3047.3719134969	440153.15893803
54	2934.3543929202	423087.51333095
55	2820.5834222063	405908.09675316
56	2706.0539783544	388614.15073151
57	2590.7610048767	371204.91173639
58	2474.6994115759	353679.61114797
59	2357.8640743198	336037.47522228
60	2240.2498348152	318277.7250571

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

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

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

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 .