This tool allows you to compare different mutual fund investment modes like SIP, growth-SIP, lump sum, STP and VIP. Using historical Sensex monthly data (source: Capitalmind.in) it calculates, for each investment mode, the probability of loss (ie. portfolio value less than total investment). It also calculates the probability of one mode outperforming the other. For example probability of growth-SIPs doing better than SIPs, STP doing better than lump sum etc. For an input investment duration (eg. 10 yrs) the probability calculations are made by considering every possible such duration between a start year and an end year which can be chosen between 1980 to 2012 (277 such periods for 10 yrs duration).

Before I discuss some results obtained from the comparator, here are simple definitions of each investment mode:

**SIP:** Buy mutual fund units each month with a fixed amount.

**Growth-SIP:** Same as above but the investment amount increases each year (typically by a fixed percentage)

** Lump sum:** Make a one-time purchase of MF units with a large sum of money.

**STP:** Systematic transfer plan. Instead of making a lump sum investment, invest smaller (typically equal) chunks of the amount over a few months to decrease market risk associated with lump sum investing.

**VIP**: Buy more MF units when the market (therefore the fund and therefore the investor’s portfolio) performs lower than *expectation* and vice versa. So you need to set an expected return, a min, nominal and maximum amount for monthly investment. The expected portfolio value is calculated with the nominal investment amount. You can read more about this here.

**Results: **I have already reviewed the VIP vs. SIP investment mode and found the former not as impressive as it is made out to be. So let us look at the other modes. Both probabilities mentioned above were calculated for all possible 3,5,7,10,15,20 and 25-year periods between 1980 and 2012. Results are summarized in the graph below.

** **

**Conclusions:**

- For a 7-year goal the SIP mode has only 75% chance of reaching the target. It is much less for lower durations (bottom row, left graph)
- For durations of more than 15 years the SIP has little chance of loss and high enough chance of bettering the target. Of course we must remember that history never repeats itself when we want it to.

**Lump sum vs. STP**

- Interestingly both lump sum and STP modes have similar probability of loss irrespective of duration.
- The chance of STP doing better than lump sum mode is only 25-35% for all durations.

**Growth-SIP vs. SIP**

There are two kinds of growth-SIPs. Suppose you use a goal calculator and determine Rs. 5000 as the SIP amount needed to achieve a goal. One way to do a growth-SIP is to start with Rs. 5000 and increase the amount each year by, say, 10%. The other way to do a growth-SIP is to determine the initial SIP amount needed to achieve the goal for a pre-determined annual increase in the SIP amount (say 10%). In this case the SIP amount will be smaller. Let us say it is Rs. 3200. Thus we have:

SIP: Rs. 5000 every year

Growth-SIP I: Rs. 5000 increasing each year by 10%

Growth-SIP II: Rs. 3200 increasing each year by 10%

Comparing SIP with growth-SIP I (GSIP-I) and claiming GSIP as superior is silly since you are investing much more than a SIP. *Because* you invest more the chance of reaching of GSIP-I doing better than a SIP is always 100%! For the same reason GSIP-I also has a higher chance of bettering the (SIPs) target. However, the probability of loss is nearly the same as that of a SIP. Unfortunately many ‘experts’ only make this kind of comparison (see postscript below).

Comparing GSIP-II with a SIP makes much more sense because the total investment amounts are comparable and both amounts are calculated for the same target. What is interesting is the average interest rate (compounded annual growth rate) is *identical* for both GSIP-I and GSIP-II and *always* higher than that for a SIP. The probability of loss for I and II is also identical (and nearly same as that for a SIP). However,

- The probability of GSIP-II performing better than a SIP is practically miniscule irrespective of duration. A SIP has a better chance of better the target than a GSIP-II (graphs in the bottom row).
- Of course if you have the money, increasing the SIP amount each year whether your goal calculation recommends it or not makes sense. You are increasing your chances of success. Doing/recommending this is not ratification of GSIP-I. It is ratification that the standard SIP method has a high enough chance of failing.

*Take-away:*

- Use MFs with caution for medium-term (less than 10 yr) goals. Of course stay away from them for short-term goals.
- Just because you have started a SIP hardly means you will achieve your goal. There is a strong enough chance that you won’t and decent chance you will lose money!
- For the long term investor the STP mode offers no great advantage over the lump sum mode in terms of risk. There is about 25% chance of higher returns with the STP mode. For short durations STP could lower risk, but then again why would you want to invest a large amount in MFs for short durations!
- Unless you have a lump sum to the tune of, say, 500 times your monthly savings, don’t bother with a STP. It is not worth it. At least don’t bother searching for a liquid fund to do the STP. A STP can be done with a SB account! It is ridiculous how many ‘experts’ focus on the higher returns of a liquid fund over a SB account and recommend a STP without considering tax issues. If you are a fan of STP, at least choose a liquid fund with daily/weekly dividend option to minimise short-term capital gains from the source fund.

** Final word:**

Perhaps we should do away with all goal calculators and instead practice/advice: *invest as much as you can, as often as you can and do remember no investment mode is fool proof.*

**Postscript: ** Moneylife Magazine carried an article titled, **SIP Smartly** (needs a min subscription of Rs. 100 99/- to fully view the article. Money well spent though.) in June 2012. It claims to the ‘first comprehensive and unbiased research on SIPs’. Don’t know about ‘first’, likely to be unbiased – given their reputation, but it is certainly not comprehensive. It does not take into account durations higher than 10 years. As seen above it is very important to do so. They also consider only GSIP-I.

**Download the**

**Comprehensive Mutual Fund Investment Mode Comparator Version 1**

(.xlsm files made in Excel 2010. Should work in Excel 2007. Macros need to be enabled in order for the excel file to run. If you need a .xls version leave a note in the comments section)

**Comprehensive Mutual Fund Investment Mode Comparator Version 2**

**Note:**

Version 1: Here the SIP amount is an input and the target amount is calculated for given rate of return.

Version 2: Here the target amount is an input and the SIP amount is calculated for given rate of return.

Version 2 is based on suggestions from Sreekant Vaithiyanathon (comments section), founder and financial planner at MoneyCare Solutions

Needless to say, feedback will be greatly appreciated.

## ❖

**About the Author**M. Pattabiraman is the co-author of two books:

**You can be rich too with goal based investing**and

**Gamechanger**. “

**Pattu**” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners.

**Contact information:**freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include

*World Bank*, RBI,

*BHEL*, Asian Paints.

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Wow ..what a comparison..

Pattu I am confused of the time length for mutual fund investments .comparison such as these scare me you know “torture numbers and they confess to anything”

If we keep the numbers aside and try to find why it happened, maybe it would help us to know better.

Your advice seems to make lot of sense..” invest as much as you can, as often as you can and do remember no investment mode is fool proof.”

Thanks. The bottom line is if you want to rely on MFs for your goals, they better be really long term ones (at least 15 years). Any lower there is pretty good chance of losing money and /or not reaching your target.

“torture numbers and they confess to anything” This quote applies only to people with an agenda. If you look at the Moneylife article I had mentioned in the postscript they have not mentioned about really long term investments (15 yrs and above). That is because their agenda is to prove that SIP is not as as great a tool as made out by financial planners. Another reason why financial literacy is best promoted by amateurs with no agenda. A person with no agenda looks at all sides of the picture before coming to a conclusion. In almost all cases the conclusion is plain old commonsense. Which is what this is:

” invest as much as you can, as often as you can and do remember no investment mode is fool proof.”

Personal finance has two parts: generic advice and personal advice. Personal advice is truly personal. Generic advice is deeply grounded in mathematics. So we cannot escape math and numbers.

Sir, good idea to build such a comparison tool and great effort that you have put into this.

I have a small suggestion. Can you make the target amount input-able along with the return expectations, period and SIP/LS amounts to identify the best amongst the options? That is work backward from the target and test the possibility of loss / achieving the target with each option. I feel that would make it more usable, even if the rear view mirror is not always that useful.

Hope I am clear.

Thank very much for your suggestion. I will incorporate it soon.

Pattu very interesting & a lot of effort, but got me a little confused with your conclusions for the long-term (more than 15-years) – especially as regards to if lump-sum better than STP – which do you think is better?

Hi Jagbir, Thanks. The results show for more than 15 years the STP method offer about 30% chance of higher returns. So using STP is fine. Doing it in an elaborate way: choosing a liquid fund setting up a transfer is a waste of time. Simple manual STP from SB acc to equity MF over the course of a month or maybe 2 months on days when sensex/nifty drop by 0.5-1% or more is good enough to mitigate risk.

Thanks for your response. But, I had read a post by Ms Uma Sashikant in the Eco times a few weeks ago where she concluded lump sum was better than Stp if one had invested in the sensex in 1978 till 2012. Probably one would get different results depending on the the period selected? Appreciate your thoughts on this.

Anyways, great work by you. Simply love your post & your calculators. Thanks for sharing them with us.

Hi Jagbir,

She is correct. If you set the duration of investment as 33 yrs (max possible bet. 1980 and 2012) a lumpsum invest. of 1L would have yielded 1,66,39,107

and a STP 1,59,43,873.

The message if investing for over 10 yrs or more it does not matter which way you do it. But then again the point is if you are not investing for over 10 yrs why invest a lump sum in equity!! Many ‘experts’ don’t consider such aspects while advising in blog.

pattu sir,

after reading this i am bit confused.I felt MF route is the best o achieve to goals since i am not good in picking individual shares.what is the alternative for MF for periods shorter than 10yrs? Is it again FD or RD?

Dear Dilip,

For periods less than 10 year equity component is best limited to about 30-40%. If I can invest 5000 each month for such a goal, best to invest 70-60% in a debt fund and rest in large cap equity funds. A balanced equity fund is also fine as it lowers the risk a bit. Remember for a goal 10 years away, equity exposure should be limited to about 8 years. Once you are two years away from your goal shift all equity to debt to safe guard the corpus.

Really Great to use. Thanks

Many thanks, Prabir.

A very useful anylysis. I got to this blog from your post in jagoinvestor site. I am investing in HDFC op 200 from last 2 years and have added ICICI Prudential Discovery G and SBI FMCG FUND Dividend Reinvestment since the beginning of this year. I have seen HDFC not doing as per expectations these last couple of years. Do you think I should stay invested in HDFC? Also can you give me some feedback on the other two funds I have chosen? My SIP is 5000 each month in each of these funds. I know they are mainly equity based but I am willing to take some risks and stay invested for 10+ years. Are there any funds which will balance the above 3 for 10+ years?

Again thanks for your sharing your thoughts on investing.

Dear Srikanth,

Thank you. Regarding my thoughts on HDFC Top 200 please see this

http://freefincal.com/mutual-fund-analysis-hdfc-top-200-fund/

I am not comfortable about sector funds. Even if I did, I would have preferred the growth option instead of the dividend reinvestment option.

You will some debt component an income fund like

Templeton India Income Opportunities

Please do rebalance from time to time. Please my rebalancing calculators.

Also stay tuned for updates. I will be posting a SIP analyzer shortly.

It can’t be a better place to read and improve knowledge about stock broking or investment planning then your blog. It was a pleasant time which i spent on your blog. thanks for sharing such a valuable information with us. Hope to visit your blog again and read even more interesting articles from you.

With Reagrds

The Finapolis Magazine

Thank you 🙂

Great work!! Please kindly suggest how to compare STP combos of liquid and equity funds from different fund houses using your calculators. Many thanks!

Thank Neeru. You don’t have to analyse the combo. You need to decide on the equity fund and simply choose the liquid fund available from the fund house.

To choose the equity fund you could use either

http://freefincal.com/step-by-step-guide-to-selecting-a-mutual-fund/

or

http://freefincal.com/mutual-fund-rolling-returns-calculator/