Comparing SIP or Lumpsum? Here’s What Experts Want You to Pick
Several investors face the real challenge when they decide the mode of investment in mutual funds. This time, to help all clear the dilemma, we have explained the situation using the example of Mr. X. So, let’s find out what can be the right choice for you.
Instance: Mr. X followed the universal equation for shortlisting the best suitable mutual funds which is setting up an investment objective, deciding on the tenure, and finally analyzing the risk profile. After this exercise, he finalized a list of the best recommended mutual funds and was ready to start his investment. But right before the final step, he got stuck when it was the time to select the mode of investment. He got confused and ran to the experts to know which mode will be the best suitable for him.
Experts’ Suggestion: We told him that he could select the mode of investment according to his convenience; he can opt for SIP where he can invest a fixed amount at regular intervals in a mutual fund. On the other hand, there is Lump sum investment where he will be required to invest a particular amount all at a single time for a defined number of years in order to experience monetary growth.
After knowing this, Mr. X’s curiosity rose, and he wanted to learn the technical concepts which explain whether SIP or Lumpsum is suitable considering his case. To this, we demonstrated him telling that the market is cyclical, and it can be a highly rewarding game too. This game is often won by players who are disciplined and stay for long. There will be a period when the market experiences a downtrend, resulting in loss of money. This is the situation of the actual test of discipline and patience.
To make him understand the situation more precisely, an example of the market’s behavior, in the long run, was discussed. Let’s see what it was!
Here, we considered investment in SIP and lumpsum for a tenure of 10 years from the period 2007 to 2017. Taking Sensex as the benchmark, we calculated how the investment would have performed in different market cycles considering both the modes.
Investment Start Date: January 1st, 2007
Lump sum Amount: Rs 1,32,000
SIP Amount: Rs 1000 per month for 10 years, thus making it Rs 1,32,000
- Initial Phase: When the market was positive Early 2007 was quite a positive year which was booming towards the bubble phase. At that time, the market delivered quite an impressive returns of about 47%. In the case of lumpsum, the investment started when there was an upsurge in the market. That’s why lumpsum managed to beat the SIP returns as SIP is the format of investment where one invests every month to average out the cost. Thus, the return in lumpsum was 41%, and that of SIP was only 29%.
- Second Phase: When the market moved in the negative zone As we have discussed earlier, the market is cyclical, and after growth in 2007, it suddenly collapsed and started giving negative returns in 2008 due to the US market crash. In the same year, the market fell by 44% and co-relatively, the lumpsum investment dropped by 36%. However, this time SIP managed to beat not even the market’s returns but lumpsum as well. It got the benefit of rupee-cost averaging, thus in the negative market investors managed to buy more units.
- Last Phase: Long-term growth We often talk about the benefits one can accumulate via mutual funds if the investment is made for the long run. The above example is a reasonable justification of our point; in the short term, neither SIP nor lumpsum was able to beat the market returns. However, in the long run, lumpsum beats the market returns with an excellent margin of more than 75%.
Conclusion: After explaining him the instance, we offered Mr. X two choices at the end. If he has a significant amount to invest, is patient, and ready to stomach high risk at the time of negative cycle in the market, then he could opt for lump sum investment. Otherwise, SIP is the mode for him where he has the confidence to fight the market even in adverse situations. With SIP, he can put aside his emotions out of the investment decision and be disciplined about investing. It’s also a conventional mode for him in case he doesn’t have money to invest in bulk.
Besides, as in the case of mutual funds where investors get to diversify across a basket of stocks, SIP helps to diversify over time too. One can average out the cost of purchase over an extended period.
We hope after reading this blog, all our investors who have the same confusion as Mr. X would be able to make the right decision. Lastly, no matter which mode you choose for yourself, staying committed to your investment objective for a long tenure would definitely help.
For a more personalized suggestion, connect with our experts via call or email. Happy Investing!