SIPs Vs Lump Sum

SIPs Vs Lump sum Investing? There are various articles that say systematic investment plans(or SIPs) are the best route to be taken for investing in Mutual Funds. Various SIP calculators help you plan for that goal, many websites, and financial planners will also advocate the Top SIP plans to invest. Most will talk about rupee cost averaging & the benefits of SIPs, stating that getting into the stock Market via lump sum investment may not be the best way. While one may get into the best mutual fund for SIP, can one expect better returns than lump sum investing by using SIP as the investing mode?

SIPs or Lump Sum: Invest for Time not Timing

Investing is always about the ability to generate returns. Whether it's a lump sum investment or a systematic Investment plan, one needs to be prudent and make the correct decisions. Investing in Mutual Funds is not always about selecting the best mutual funds or the Best SIP Plans. There is much more that needs to be considered. Especially, if one is thinking about investing in the equity markets, one needs to be even more careful. An analysis of the stock market (taking the BSE Sensex as the benchmark) yields that the chance of making returns increases if one stays invested for a long term. As one can see from the table below, if one just goes by numbers, there is a 30% chance that you may make a loss if you plan to stay invested in the stock market for only 1 year.

Hence most advisors when talking about equity investments would always relate to equities with "long term investing". If one plans to stay invested for 5 years the probability to make loss drops to 13%. And if one is truly long-term ( more than 10 years), than the ability to make a loss tends towards zero. Hence, if one is really interested in making money from the stock market, its all about spending time in the stock market. (rather than marking timing!)

SIPs or Lump Sum: An Analysis

It's quite clear that investing in the equity markets is a long-term game. A lot of people advocate that the benefits of SIPs extend from rupee cost averaging to disciplined investing, but there is a bigger question to be answered, do SIPs deliver better returns than lump sum investing?

We tried to get a deeper understanding of this question by looking at the equity markets since 1979 (since the inception of the BSE Sensex). The BSE Sensex is a composition of the top 30 companies in India and is a representation of the equity market. Analysing this data, we could get some insights to see if SIPs or lump sum, which is better.

Worst Periods of Stock Market

The worst period to start investing was around September 1994 (this was the time when the stock market had peaked). In fact, if one looks at market data the investor who had invested a lump sum sat on negative returns for 59 months( nearly 5 years!). The investor broke even in about July of 1999. The next year though some returns were generated, these returns were short lived due to the 2000 stock market crash subsequently. After suffering for another 4 years (with negative returns) and the investor finally became positive in October 2003. This was possibly the worst time to have invested a lump sum.

What happened to the SIP investor? The systematic Investment Plan investor was negative for only 19 months and started posting profits, however, these were short-lived. The SIP investors were up again by May 1999 after suffering interim losses. While the journey still continued to be shaky, SIP investors showed profits in the Portfolio much earlier. The maximum loss for the lump sum investor was nearly 40%, whereas for the SIP investor was 23%. The systematic investment plan investor had a faster recovery period as well as a lower loss in the portfolio.

Another very gloomy period to start investing was around March 2000 (this was the time when the stock market had peaked, again!). In fact, if one looks at market data the investor who had invested a lump sum sat on negative returns for 45 months straight( nearly 4 years!). The investor broke even in about of December of 2003. The next year though some returns were generated, these returns were short lived due to a slip again in 2004. After suffering for another 1 year, the investor finally became positive in September 2004. This was another bad time to have invested a lump sum.

What was the story of the SIP investor who started investing in March of 2000? If one invested monthly sums of equal amounts, the investor was positive in June 2003 and by September 2004, the portfolio was up 45% overall. (when the lump sum investor was breaking even). Another aspect to note is the maximum loss, the lump sum investor has suffered a nearly 50% loss by September 2001, comparatively, the SIP portfolio loss was 28% at the same time.

What we can get from the above is that when the stock market is in for a bad period, it's always better to be in a SIP since the recovery is faster and also one sees lower losses in the portfolio too.

Best Periods of the Stock Market

Looking at the last 37 years data of the stock market from 1979 to 2016, one deciphers that if one invested early on (1979 - inception time of the BSE Sensex), one hardly saw any negative returns in the portfolio.

A 5-year analysis from August 1979 shows that both the lump sum and Systematic Investment Plan portfolios posted hardly any loss in any time period from there. As one can see from the graph below, both portfolios posted handsome profits year-on-year. At the end of every year, the lump sum portfolio overtook the SIP portfolio and increased the lead margin too.

Hence, in case the market is expected to go one way up, the lump sum is always the better option.

Which is Better Investment Mode?

While we can analyse all periods of the stock market, can we really decide which is better? The answer to this varies from individual to individual, the cash flows, investing(or holding) periods, outgoing cash flows or requirements etc. SIPs are a great tool to inculcate the habit of savings, they channelize the investment of individuals into the stock market. One also has to plan for investing for the long term if you plan to invest in equities, where we clearly know that the ability to generate returns increases with time. Also, if one feels the markets may be choppy and not a straight line up, then SIPs are a great tool to enter the market. Additionally, data shows that SIPs also ensure that the investor suffers lower losses at any time.

In case there is feeling that the market would be secular (one way!) on the upside, in that situation, lump sum investing would be the way to go.

Best Performing SIP Plans in India 2025

Conclusion

The final choice to invest via the lump sum route or SIPs would be a culmination of many factors, however, the investor needs to take into account all these and his/her risk appetite to choose the best route. Choose well, choose wisely, stay invested!