Mutual Fund Investment: (Systematic Investment) SIP or Lump sum?

There have always been a debate on which is a better way for investment in Mutual Fund – Lump sum or Systematic Investment Plan (SIP). Actually the answer to this is not easy and it depends on the time frame we are looking at. There have been some phases where SIP has outperformed while at other times lump sum investment has done better. We have picked up 5 different situations of Indian Stock market since year 2000.

Here are some Assumptions:

1. Rs. 60,000 is invested in both lump sum and SIP and is used for buying SENSEX.
2. Since the cash flow structure for the two is different, to make it comparable we assume that SIP investor puts the entire amount in a debt fund and starts systematic transfer plan (STP) to the equity fund.
3. The above debt fund gives a return of 8% per annum.

Market Phases:

Dec 2007 – March 2009 – Constant Declining Market

The loss in case of SIP is lower than Lump sum investment. So SIP wins in case of Constant Declining Market.

Jan 2005 – December 2007 – Constant Rising Market

Both kind of investment gives good returns, but SIP would never be able to beat Lump Sum in case of Constant Rising Market. So Lump Sum wins in case of Constant Rising Market.

January 2000 – November 2003 – Declining and then Rising Market

SIPs yield the best results if the market falls initially and recovers subsequently. The SIP investor gains because he gets to buy at lower levels.

January 2006 – February 2009 – Rising and then Declining Market

If the market rises initially and then declines sharply, the SIP investor will suffer bigger losses than lump sum investor.

August 2011 – August 2012 – Volatile Market

The SIP route works well in volatile market, especially if the market breaks out and rises. The lump sum investor would gain too but marginally.

How to use the above information?

If you check Sensex since 1988, you would find that markets are volatile most of the time and remains flat. So its good idea to invest through SIP. Whenever the market corrects sharply and becomes under valued, you should invest some amount in lump sum. This would give a kicker to your portfolio.

Conclusion:

The question which should be preferable mode of investment in Mutual Fund – SIP or lump sum? The answer is it should not be SIP or lump sum but SIP and lump sum. Keep a regular SIP investment in MFs and top up your investment with lump sum when the market falls.