SIP vs Lump sum – Let us choose wisely

SIP – Current Review

SIP is a famous word. Many investors start SIP with high expectation. In the last two years, many more fund houses and intermediaries, encouraged investors to have SIP based investments. Have their expectations been met? If we evaluate SIP’s performance in this fallen market, then the obvious answer would be ‘NO’. Should we feel bad for the fate of SIP? Not really, instead it would be good to understand what SIP actually is!

Due to the fall in markets, the profits we get out of SIP is also falling. The best Equity funds 1-year SIP return percentage ranges from -5% to -15%. The returns from the other funds might be even lesser than this which is clear from the table shown below. Is this the outcome that we envisioned while we invested? Certainly not, our expectation was that SIP is a Superstar plan and there was no way that it can produce losses. But in reality, the return numbers returned by SIP is lower than the ones we expected.

Value Research’s top 5 star studded best Equity funds profit percentage – 10 Nov 2018
Fund	Type	1 Year	3 Years	5 Years
Axis Long Term	Tax	-5.45	10.09	12.74
Mirae Asset Emerging Bluechip	Large and Mid-Cap	-5	12.37	18.42
Axis Bluechip	Large Cap	-3.21	11.02	10.78
L&T Mid Cap	Mid Cap	-15.15	9.26	15.65

SIP vs Lumpsum

Some people are now thinking that they should have invested in Lumpsum instead of SIP. It’s like the saying “The grass is always greener on the other side of the fence”. The closer we go, the dangers of Lumpsum becomes visible. To understand SIP and Lumpsum, we also need to take a closer look at Lifestyle practices. In some situations, you might not be able to invest in Lumpsum plans. For instance, a monthly salaried person who wishes to invest small amounts in mutual funds every month might find it comfortable to invest in a SIP plan. Similarly, when you have the money readily available to invest in a Lumpsum fashion, it is not advantageous to invest in a SIP based plan. In this market fallen times, it would be more profitable if we invest through the Lumpsum option. When we have enough money in hand, we shouldn’t be adamant that we will invest only through SIP. In the coming months and years, if the market keeps fluctuating, then SIP mode might be suitable.

Example to understand better

The following table gives, returns for investment done for same amount and same duration via Lump sum and SIP. Let us keep in mind, in lump sum, the money is with fund house for more time, where as in SIP, money is paid in installments – hence return varies. For simplicity purpose, we have taken the returns for the amount invested with fund only. (See the blue shaded first case in the table, for SIP absolute market value is less = 162707 but annual return is more = 10.10%, whereas in  lump sum, absolute market value is more = 172451 but return is less = 6.5%  this is because in lump sum, invested amount is more time in the fund than sip, but created less return, because investment started when market was trending higher vale –Sensex 29220)

Fund used for comparison = Axis Blue-chip Fund - Growth

SIP amount per month = Rs 3,000

Return calculations till 12/11/2018

Current Sensex = 34812 (on the day of return calculation)

Start date	Paid months	Invested value	Market value	Return	Sensex	Mode
27-02-2015	45	135000	162,604	10.10%	29220	SIP
27-02-2015		135000	172,451	6.5%		Lump sum
16-09-2016	26	78000	85,913	8.92%	28599	SIP
16-09-2016		78000	96,498	9.9%		Lump sum
23-12-2016	23	69000	74,640	8.32%	26090	SIP
23-12-2016		69000	97,734	18.3%		Lump sum

Some important points that we need to know about SIP

• SIP is not isolated from the falling markets. Profit and Loss is part of the market. SIP can lead to losses too. 
• During current market weakness, we should not stop investing in SIP based plans. SIP investments can turn out good during fluctuating markets. 
• One thing that was evident from the table is, even when SIP posted negative 1-year returns, its 5-year returns looked to be in good shape. 
• During the SIP time period itself, we can invest in the same plan on a Lumpsum option at least once. This one has a chance of turning profitable. There is nothing wrong in this and need not worry about it. 
• Investing in the peak times SIP is better than lump sum – first case in the table with light blue shade
• SIP in rising market will not give better returns, lump sum at the beginning of rising market will give good returns – refer Last case in the table – light green shade.
• There are two kinds of investment options. Based on the situation and the amount of money we are willing to invest, we can invest in either of the options. It is very hard to predict or conclude which option is the best for each time period.

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