LUMPSUM Vs SIP- WHICH IS BETTER INVESTMENT STRATEGY FOR EQUITY INVESTING

Lump sum investments are one time Investments. you need to be aware of the market cycles or trends to identify the right time to invest lumpsum amount.  This investment is generally opted for when the market is bearish.

Systematic Investment Plan (SIP) is an investment option available for mutual fund investors. Investors can invest a fixed sum on a regular basis. Also, one can start with a one time investment in SIP and then continue with regular periodic investments.

One of the many questions that every investor has is whether they should invest in equity mutual funds through SIP or lumpsum. We are not talking about debt investing where the obvious choice is lumpsum because there is no volatility in debt market.

SIP Investments are for those who don't have large sums of lumpsum amount and have regular cash flows from monthly income. SIPs Investments give you mental peace and good night sleep in the falling market because you accumulate more units of mutual funds. It provides the advantage of rupee cost averaging, prevents the problem of timing of the market, inculcates a discipline approach of investing.

For a long term investment, of say 15-20 years, SIP is a better option because market always remain volatile and SIP provides rupee cost averaging, which in long term,  give high returns.

Remember 2008, if you had invested rupees 12 lakh as lumpsum, that investment would have gone down  by more than 50% (as seen in the chart below) by the end of the year.  Only those had a very strongly appetite could see off this phase and see their one-time investment grow back to rupees 10.6 lakh (which is still  a loss) by 2009 end.

The SIP route, too, saw a fall during 2008 but the drop was less alarming when compared to lump sum investment.  in addition, the Rs 12 lakh investment grew to 16.39 lakh by the end of 2009, which means an SIP investor made a gain of more than Rs 6 lakh as against a lumpsum investor.

Clearly SIP beats lumpsum  investment when the markets are negative or volatile. Markets will always remain volatile and will never move in one direction. Hence, chances of SIP beating the lumpsum investments are always high.

Lumpsum investment tends to do better when the markets are on the rise. There is only one situation when lumpsum investment can be better than SIP Investment. Suppose, you invest today and in the next 15 years, the markets keep on rising every year for the next 15 years then your lumpsum returns will be better than SIP. But this will never happen in the equity market. The nature of the equity market is always volatile. It never moves in one direction.

Suppose you start investing in SIPs and  markets start coming down or moves sideways for the next two to three years. What will be your reaction after watching no returns from your investment in SIPs? You will be frustrated and start doubting your wisdom to invest in equity market. This is where you need to understand the concept of SIPs. During these periods of distress in the market, you will be accumulating more number of mutual fund units than in the rising market (units will be cheaper due to lower NAV), which will fetch you much higher returns in the end. Market drawdowns and crashes are considered as the biggest enemy of mutual fund Investors. Please don't consider the falling markets as your enemy.  SIP investment makes your enemy (falling market) your best friend because that is the time when you make most of your money. So, the SIP mutual fund investor must never be afraid of falling market rather you should be happy about it.

If you start your SIP and markets remain volatile throughout your investment horizon, your returns will be maximum because you will also keep buying at lower NAVs and collect more and more units. Finally, what matters is the number of units you have. The terminal value is the number of units multiplied by NAV. Markets will always remain volatile. It never moves in linear fashion. Understand and enjoy the beauty of SIP.

Japan equity market didn't move up for thirty years. According to a survey, If someone had invested in Japan equity market 30 years back as a lumpsum then even today, you would have been sitting at loss but if you had invested through SIP then even today you would be sitting at profit. This is the advantage of rupee cost averaging.

Moreover, the longer the investor stays, they can realize the beauty of SIPs and enjoy the benefit of power of compounding which is the eighth wonder of the world (Albert Einstein). Investing is simple, don't make it complicated. Consult your Investment Advisor or Mutual Fund Distributor for understanding the investment strategies before investing in Equity Market.

We are operating a Mutual Fund Distribution  Firm Investor First. We are one of the highest ranking  investment firms in Uttarakhand and Dehradun. Rest assured that your interests and benefits will always be first and foremost. For any kind of investment planning, you can contact us at the following address :

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REFERENCES:

https://scripbox.com/mf/sip-vs-lumpsum-when-to-choose-what/

https://www.youtube.com/watch?v=oVqlsAeoNWM&t=2223s

https://www.valueresearchonline.com/stories/50916/sip-or-lumpsum-which-is-better/

https://www.businesstoday.in/personal-finance/investment/story/lump-sum-vs-sip-which-mutual-fund-suits-you-best-331199-2022-04-26

DISCLAIMER : The above information is available on public domain and has been taken mostly  from the above mentioned websites  and  YouTube  videos freely  available  on  internet.   The opinion expressed above is in no way recommendation of buying or selling.  You must consult your financial advisor before making any fresh investment in equity market.