SIP versus Lumpsum: Who is the winner?
After a dream run between 2014 and 2017, mutual funds turned a nightmare for many investors. This is especially true for those investors who joined the party at the end of 2017. In the last one year, the average returns generated by equity MF schemes have been negative 1.55 per cent. Nonetheless, returns are worse for those investors who chose a systematic invested plan (SIP) to invest. The average SIP return in the same duration comes to around negative 5.18 per cent. Even in case of three-year returns, SIPs are losing to lumpsum investment.
| Category | Average of 1-Year Return (%) | Average of SIP Returns (1 Yr) |
| ELSS | -4.74 | -6.41 |
| International | 4.67 | 4.22 |
| Large & Midcap | -5.92 | -7.27 |
| Large-cap | 2.21 | -0.90 |
| Mid-cap | -9.67 | -10.29 |
| Multi-cap | -3.50 | -5.39 |
| Bank | 1.68 | -1.63 |
| INFRA | -17.18 | -13.89 |
| IT | 15.88 | 11.95 |
| Pharma | -0.98 | -2.64 |
| Small Cap | -17.22 | -16.28 |
| Consumption | -3.20 | -6.88 |
| DIV Yield | -6.74 | -7.05 |
| Energy | -14.37 | -11.17 |
| MNC | -2.02 | -4.44 |
| PSU | -16.81 | -12.19 |
| THEMATIC | -6.68 | -8.59 |
| Value | -7.69 | -8.35 |
There are only three categories of funds where SIP returns were better than the lumpsum returns in the last one year. The categories are Small-cap, Infra and PSU. Does this mean that investors should choose lumpsum option instead of SIP? To get the answer to this question you need to know when SIP may not give you better returns.
The first condition is when the market is moving up continuously and as in a rising market, every subsequent SIP will be valued at a higher NAV and the average returns would tend to drop at every SIP. Even in a continuous falling market, the SIP return would be lower as you have been buying your units at a higher price. So, if SIP does not work in the rising and falling market, when does it work? The answer to this is, it works best in volatile markets and in long run, but both conditions should be satisfied.
SIPs help with 'cost averaging' because as the NAV falls, you get more units of the fund. Conversely, if the market rises you get fewer units. In the short run, the direction of the market either going up or down may not give you better returns as it does not help cost averaging. However, in the long run (greater than 3 years) SIP generates better returns as the market is likely to give positive returns and your cost averaging might work.