Myth buster: SIP is superior to lumpsum investment

One may come across many financial advisors or planners who will advise you to invest via systematic investment plan (SIP) mode. Even if you have a capability to invest in lumpsum, they would rather suggest you to opt for systematic transfer plan (STP) by parking a lumpsum amount in the liquid fund and transferring the so-called ‘advised amount of money’ to the advised fund. STP can also be called as an advanced version of SIP.

However, very few financial planners will advise you to invest in lumpsum. They believe that investing via lumpsum increases the risk and one needs to time the market in order to get benefit out of it. On the contrary, with SIP, you don’t need to time the market, since you tend to buy more units when the market falls and fewer units when the market goes up, which in turn, averages out at the end. However, is it really the case? We will find it out.

Let us look at the following illustration to understand it better. In the illustration, we would take two scenarios. In the first scenario, we would assume that you invest via SIP and lumpsum at the bottom of the market whereas, in the second scenario, we would assume that you invest in SIP and lumpsum when the market is at top. Finally, we would conclude with how much you were able to accumulate via lumpsum and SIP.

For this, we will take the investment period for the first scenario to be from November 2008 to March 2020. BSE 500 was at 3,295.60 in November 2008. For the second scenario, the period of study is from January 2008 to March 2020. BSE 500 was at 7,160.03 in January 2008. The SIP amount is assumed to be Rs 10,000 per month.

Scenario I:

As we can see from the above table that at the end of the period, lumpsum gave better CAGR than SIP. Many might argue that this is because we have considered investment at the bottom of the market. To counter this thought, let us look at the other scenario.

Scenario II:

Now you might wonder how it is possible. This is because in the case of lumpsum, you hold the complete investment for a longer period of time. However, in case of SIP, only first investment of Rs 10,000 is held for the same time as lumpsum. As you move ahead, the amount of time till the investment is held, drops. Even if we look at XIRR of both the scenarios then, lumpsum goes ahead of SIP. In scenario one, XIRR of SIP is 5.67 per cent and that of lumpsum is 11.89 per cent. Whereas, in scenario two, XIRR of SIP is 2.03 per cent and that of lumpsum is 4.23 per cent.

Therefore, one should understand that this is the game of time. The more time you give to your investment, the better it will grow. SIP & lumpsum are just two methods of investing in mutual funds and its nothing like one is better than the other. If you have a lump sum amount, then clearly go ahead and invest in lumpsum. But if you don’t have a lump sum to invest then, opt for SIP mode.