SIP Vs Lump sum – Which is better in Mutual Funds Investing?

I don’t like such questions.

Is it better to invest lump sum or monthly SIP in mutual funds?

A lot of people ask me such questions – whether SIP (Systematic Investment Plan) is better than lump sum investing in mutual funds in India? Or whether lumpsum investing is better than mutual fund SIP?

Why I don’t like these questions (are SIPs better than lumpsum investments?) is because as usual, there is no one right answer here.

There are shades of grey and it isn’t exactly an ideal comparison.

People want to simply compare SIP vs one time investment in mutual funds or just want to find out which are top mutual funds for SIP in 2019 or best mutual funds for lump sum investment in 2019 and what not. But there are no perfect answers or ready lists that predict anything.

And let’s look at it from a common-sense perspective.

Before even getting into lump sum vs monthly investment debate, the decision to invest in lump sum or SIP depends on whether one actually has enough investible surplus that can be called as lumpsum!

Right?

If one doesn’t even have this ‘lump sum’ then this question of SIP or lump sum in itself is meaningless. It’s only when this ‘lumpsum’ is actually available that the question holds any relevance.

And once the lump sum is there, the next question should be whether investing in one go is better or whether it’s wiser to spread that lump sum over a short period of time, as there can be several best ways to invest a large sum of money in mutual funds. Just because the lump sum is available doesn’t mean that the money should be invested in one go. There are can various other tactics to deploy it more efficiently.

But nevertheless, there are those who are convinced about the benefits of SIP investing and hence, prefer SIP (and have SIP success stories to tell) and there are those who prefer lump sum investing.

And to be honest, both methods work in different set of circumstances.

Let’s try to do this comparison as objectively as possible.

SIP vs Lumpsum in Rising (Bull) Markets

In a rising market, your lumpsum investments in mutual funds will produce higher returns than SIPs. That’s because the cost of purchase in a lumpsum investment in a rising market would always be lower than the average cost of purchase in SIP, which is spread out across higher and higher purchase prices for each SIP installment.

Let’s take a very simple hypothetical example to show this.

Suppose one investor invests Rs 5000 per month in a rising market for 12 months. While the other invests Rs 60,000 as lumpsum at the start itself. Both invest in mutual funds a total of Rs 60,000. Here is how it pans out over the next 12 months:

As can be seen above, the average cost (average NAV) for the SIP investor in a rising market is higher. And hence, the future hypothetical profit when sold later, will be lower for the SIP than that of the lumpsum investor.

Now let’s look at a falling market scenario.

SIP vs Lumpsum in Falling (Bear) Markets

In a falling market, the SIP investing would result in comparatively lower losses than that in lump sum. And that is because the cost of purchase in a lumpsum investment in a falling market would always be higher than the average cost of purchase in SIP.

Here is how it looks:

As can be seen, the average cost for the SIP investor in a falling market is lower. And hence, the future hypothetical profit when sold later, will be higher for the SIP investor than it is for the lumpsum investor.

So basically what is happening is that if the market grows continuously, then lump sum investing gives higher returns whereas if it falls continuously, then SIP investing is better (lesser losses than that of lumpsum investing in such scenario).

Ofcourse in practice, the markets neither go up nor go down continuously for very long. So the actual reality may be somewhere in between the two above discussed scenarios of sip vs one time investment in mutual funds.

In some cases, SIP may give better returns than lumpsum investing. While in other cases, lumpsum will give better return than SIP investing. And in many other cases, the result of both will be pretty similar.

It all depends on the future sequence of returns that the investor gets. If you want to know how much wealth your SIP will create, try using this SIP maturity value calculator.

But let me circle back to the original point I made – whether you invest lumpsum or otherwise first depends on whether you have a lumpsum or not.

Right?

And if you have, then obviously it would be wiser to just invest lumpsum when the market is low. Remember Buy-low-sell-high?

But problem is that you will never know when the market is really low. You can be wrong about your assessment and enter at precisely wrong times.

And that said, what about our ‘real’ nature and how we behave?

Most investors are unable to use common sense when their portfolios are down.

We know that the best returns come after markets have crashed.

But very few people have the guts to go out and invest more money (assuming they have more). Fear plays a major role in investing and unfortunately, you can neither back-test emotions nor fear. And you will only know in hindsight whether is it best time to invest in mutual funds or not.

Imagine investing lumpsum in December 2007 when markets were peaking and then helplessly witnessing the fall down till March 2009. On the other hand, if you invested a lump sum in March 2009 instead (at the bottom), you would have been called the next Warren Buffett!

Both are extreme examples but show how lumpsum investors potentially expose their portfolios to the vagaries of the market. There is always the risk of being completely wrong and mistiming. And that is the problem. To be fair, one can also get the timing right and if willing to spend sleepless nights in the short term, can go on to make much higher returns than usual in medium to longer term. But that’s how the dynamics of lumpsum investments are.

Due to their structural nature, SIPs reduce this risk of being completely wrong as the investments are spread out. So asking whether is this the right time to invest in SIP is immaterial as SIP spreads out your investments. Ofcourse your returns will depend on how the markets play out during the spreading-out period. But that is how it is.

For small investors, SIP is also suitable from their cashflow perspective. They rarely have access to large lumpsum that is ‘surplus enough’ to be available for long term investing.

By putting away small amounts periodically, there isn’t a large pressure on their resources and no doubt is convenient. This is the reason that for small investors, SIP is their best bet even if not a perfect strategy.

Remember that SIP is a tool to optimize returns and match your investment needs to your cashflows. It is not a magician’s magic to generate superior returns to lumpsum investing. Read that again.

And it is for this reason that SIP is better suited when investing for long term goals like retirement planning, children’s future planning, etc.

One can use the SIP investing to slowly build up a large corpus over the years without straining the finances in present or worrying about timing the markets perfectly. You can try to use this sort of yearly SIP calculator to understand how much money you need to save for various financial goals.

I know that many of you are more focused on saving taxes.

And one popular way to save taxes these days is to go for best tax saving ELSS funds vs PPF. But there also, people tend to get confused whether to go for SIP or lump sum for ELSS when investing in top ELSS mutual funds. Nevertheless, the logic that we have been discussing till now remains the same irrespective of whether it’s an ELSS fund or a normal mutual fund.

Now let’s take a step further…

What if you have a lump sum that can be invested. Should you go ahead and invest it in one go or do something else?

Should you Invest Lump Sum In One Shot Or Systematically & Gradually?

A smart investor would recognize the market bottoming out and invest in one go. But we all aren’t smart. So if you aren’t sure if it’s the right time to invest in one go, you can even deploy your lump sum gradually.

There is no one single answer to which is the best method to invest a lump sum in mutual funds?

So depending on the market conditions, investor’s investment horizon and risk (and volatility) appetite, a deployment strategy may have to be worked out. This strategy may either aim for lowering risk or maximizing returns or a combination of the two.

One way is to put lump sum investment in debt mutual fund and gradually deploy the money using STP or Systematic Transfer Plan into an equity fund.

Different investor needs would demand different lumpsum deployment strategies.

Also, it’s important to invest in the right funds and build a solid mutual fund portfolio.

Even after the recent SEBI’s mutual fund cleanup exercise, there are still several categories and hundreds of funds out there.

Being a small investor, it can be daunting to find out which are the best SIP plans that can be considered for long term investments. Or for that matter to find out which are the best mutual funds for lumpsum investment or the best tax saving mutual funds in India or whether to do ELSS SIP or lump sum.

If you don’t know how to find good funds or need help with planning your investments, do get in touch with a capable advisor to help you. It is worth it.

Finally…

I am sorry if you did not find the one specific answer to your question of SIP or Lumpsum which is better for investing.

A direct comparison between SIP and lumpsum investing is neither fair nor accurately possible. And unless we know everything about the investor in question, one cannot say confidently which is better suited for whom.

You may feel that there is a secret to find the best time to invest in mutual funds India but there is no secret. Different investors need to follow different investment strategies for SIP and lump sum investing. And ofcourse an awareness of market conditions and how market history plays out is absolutely necessary. You can’t be blind to that.

All said and done, SIP is a comparatively safer option but we cannot deny that at times, lump sum investing will provide better returns if done correctly.

Which is better SIP or lump sum investment in top best mutual funds in 2019?

This may sound repetitive but the truth is the superiority of SIP over lump sum or of lumpsum investments over SIP varies under different conditions.

Is SIP better than one time investment? Or lump sum is better than SIP? Systematic Investment Plan vs Lump sum Investment? It is all a matter of probability and what is the sequence of returns that comes in future and how investor behaves during the period in consideration. That’s all there is to it.