SIP (systematic investment plan) or lump sum – which is the best way to invest in mutual funds? Which investment method will bring more profit? A question asked by almost all new investors. We help you find the answer to this eternal debate.
SIP was introduced by Franklin Templeton Mutual Fund more than 15 years ago. The idea was simple that you buy a mutual fund unit monthly for a fixed amount. When markets are low you can buy more units and in higher markets, you will be able to buy fewer units. This not only helped average unit price over the long term but also helped people invest in a disciplined manner every month.
SIP Vs Lump sum – Cash flow- SIP Vs. The lump sum option depends on the cash you have. If you have a fund ready then you may wonder whether you should invest in one go or do a SIP. However, if you do not have lump sum money and your monthly income, then you have no option, but DO SIP. Furthermore, for a person whose future income is uncertain, SIP is not the right approach for them.
SIP vs. Lump Sum – Higher Returns?
Assuming you have a lump sum and are still in two minds – should you invest at once or spread your investment as a SIP? The underlying question is which investment option will offer higher returns? To answer this, we give you the following five market conditions from the year 2000 and see how SIP compares to lump sum investment.
1. Steady decline market
2. Constantly Growing Market
3. Decline and then rising market
4. Rising and declining market
5. Unstable Market
Here are some assumptions:
• Rupee. 60,000 are invested in both lump sum and SIP and is used to buy the SENSEX.
• Since the cash flow structure is different for both, to make it comparable we assume that the SIP investor puts the entire amount in the debt fund and starts a systematic transfer scheme (STP) in the equity fund.
• The above debt fund gives a return of 8% per year.
Continuous Decline Market (December 2007 – March 2009) – As the market is declining, you have to lose money in both SIP and lump sum investment but in case of SIP the loss is less than lump sum investment. Hence SIP wins in case of continuous decline.
Constant Rising Market (January 2005 – December 2007) – All types of investment gives positive returns, but SIP will never beat outright in case of Constant Rising Market. So in case of Constant Rising Market, the lump sum wins.
Decline and then Rising Market (January 2000 – November 2003) – Sips give the best results if the market initially falls and currently recovers. The SIP investor benefits because he gets to buy more units at lower levels.
Rising and then Declineing Market (January 2006 – February 2009) – If the market initially picks up and then declines sharply, the SIP investor will suffer a bigger loss than the outright investor.
Volatile market (August 2011 – August 2012) –SIP route works well in a volatile market, especially if the market breaks down and rises. The lump sum investor will also get a nominal benefit.
Lesson: SIP gives better returns in case of continuously declining markets, declining and then rising markets and volatile markets (which eventually exit and rise). The problem is that at the time of investment you do not know at what stage of the market you are. Even if we know which type of market SIP is better, we cannot use that information for investment.
How should you invest?
If you are salaried or have a consistent income every month, then you should go for SIP as it matches your cash flow. For the amount of money you get as a bonus or income from an existing investment or gift, you can make a SIP or lump sum investment depending on your comfort level and market understanding. If you feel that the market is under-valued (low PE is one such metric) then you can go with a lump sum, whereas in the over-value market (like the current situation) you can go for debt funds and DO STP (Systematic Transfer). Want to invest in Scheme in an equity fund).
Even under a regular SIP, you should sometimes have a sharp drop in value (when analyzed by you) or a lump sum investment in the market. To conclude that there is no definitive winner between SIP vs. Lump sum, but SIP and Lump sum investment is the way to invest with some sensible market time!