SIP vs Lumpsum... Which One Works Better in Mutual Fund Investment?

Posted On Friday, Mar 21, 2014


SIP is one of the most advocated way of investing in mutual funds. Without doubt SIP is a good tool for systematically accumulating a corpus by investing with market-linked investments for future goals. In this article we look at why or under what circumstances is SIP is a better way to invest. We will be illustrating our thoughts with numbers.

Firstly what is SIP?

SIP stands for Systematic Investment Plan, a mode of investing in mutual funds that allows one to invest fixed amounts in a specific mutual fund scheme for regular periods. It makes regular investment convenient with the auto debit facility, and affordable with a low minimum investment requirement. SIP doesn’t incur any additional charges.

However if we were to compare both lump sum and SIP mode of investments, one should understand that the performance of the particular investment will depend on the market conditions at that time and if it is invested for long term or short term in case of lump sum and cost averaging in case of SIP. Cost averaging results in an investment being purchased at an average cost spread over a period of time instead of one cost on a single day, which could be higher than or lower than the average.


Here is a demonstration of how these two factors could affect your investments –


Disclaimer: Above chart is for illustrative purpose only.


SIP does not assure a profit or guarantee protection against loss in a declining market and should not be construed as a promise, guarantee on or a forecast of any minimum returns.


Thus investing in SIP generally one would get fewer units when price is high and more units when price is low.
However the table above also makes it obvious that the game would favour lump sum investment had it been made when the unit price was lowest (generally when the equity market is down). In such a case the investments would look like this, all else remaining the same.


Disclaimer: Above chart is for illustrative purpose only.

SIP does not assure a profit or guarantee protection against loss in a declining market and should not be construed as a promise, guarantee on or a forecast of any minimum returns.


Lump sum has the potential to outshine SIP. However one should remember that SIP offers an averaged out return thus generally insulates against worst returns.


Disclaimer: Above chart is for illustrative purpose only.


SIP does not assure a profit or guarantee protection against loss in a declining market and should not be construed as a promise, guarantee on or a forecast of any minimum returns.



As the numbers above show, SIP works better than lump sum investment in volatile periods. Since no one can predict market movements accurately it is extremely risky to make bets on what time to buy units or sell them.


One brownie point for SIP

From a practical point of view SIP is the preferred route of mutual fund investments as investing through SIP's inculcates the discipline of saving & investing. It is best to align the frequency of investments with that of earning income. If you are salaried employee, you could go for monthly SIP to regularize your savings. Most of our bills have a monthly cycle so viewing SIP as a monthly 'expense' helps in the investing habit formation.


So what should it be? Lump sum or SIP?

In our view, as stated above, SIP helps you inculcate the habit of investing, and as salaries come in monthly so should investments be. However do not rule lump sum investing out, in case you get your annual bonus or an inheritance it is best to invest that money wisely in a suitable mutual fund. Thus to conclude, for investing in mutual funds we believe one could opt for SIP mode, unless you have a lump sum amount to invest for long term (more than 5 - 7 yrs). However we strongly suggest you to consult with your financial advisor before proceeding with any investment decision.



Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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