Which is better: SIP or lumpsum investment?
Making an investment decision is not an easy task. After choosing the right investment product, the next question that many investors try to answer is how to invest. There are a couple of ways by which, investors can invest in the funds that he has selected.
An investor can make a one-time investment in mutual funds through a lumpsum investment or spread it out over a period of time via a systematic investment plan (SIP). Now assuming that the investor has the cash to invest in lumpsum, which he can also invest through a systematic transfer plan (STP), which one should he choose?
To understand which one is better, we studied the returns provided by the equity-dedicated funds in the last ten years through the SIP route and lumpsum. There are 274 funds that have completed ten years. We calculated their last 10-year SIP returns as well as annualised returns of the same timeframe.
We found that out of these 274 funds, SIP returns of 248 funds have generated better returns than the lumpsum investment. This means that 90 per cent of the funds have generated returns better when the SIP route is selected. In the case of lumpsum investment, only ten per cent of the funds generated returns better than the SIP route of investment.
On average, there was a 1.2 per cent difference in the returns provided by SIP and lumpsum. There was a fund where the difference is as high as 8 per cent.
The following table shows the distribution of return difference:
|
Return (per cent) difference
|
|
Number
|
274
|
|
Mean
|
1.32
|
|
Minimum
|
-3.6
|
|
*Q1
|
0.625
|
|
Q2
|
1.2
|
|
Q2
|
1.7
|
|
Max
|
8
|
*Q represents quartile, so Q1 = Quartile 1
Therefore, if you want to invest for longer-term, better choose the SIP route as you can get the benefit of rupee cost averaging.