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Lump sum vs SIP investing in mutual funds: Which is “better”?

Lump sum vs SIP investing: Which is "better"? You might have heard this question often in personal finance forums. Perhaps you have thought about this yourself. In this post, let us trace the month-by-month return from a SIP investment and a lump sum investment started on the same date. What is the point of this study?   If you ask my personal opinion, I would say the question is, in of itself meaningless, and therefore so are the results.

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Why is the titular question meaningless? Well, we can only invest if we have money and when we have money. If I do not have a lump sum (and this means I can properly define what a lump sum is), then I don't care about this question. If I do have a lump sum, then I should ask, "is there any benefit in spreading that lump sum over a few weeks, months or years (some recommend this!), instead of putting it into the market all at once?"

If I do have a lump sum, then I should ask, "is there any benefit in spreading that lump sum over a few weeks, months or years (some recommend this!), instead of putting it into the market all at once?" More than 4 years ago, I had shown there is not much difference between a lump sum and investing it over a few weeks or months (STP):  Comprehensive Mutual Fund Investment Mode Comparator. Amusingly this is true whether this is true over the short-term or long-term!

I wrote my first Excel macro for the above post and today I have much computing ability to do a far more extensive study, but is it even necessary?! Maybe I will get around to it. For now, let us stare at a few lump sum vs SIP graphs.

In the following, the total investment amount is the same, but it is irrelevant as we will only focus on how much the returns vary month after month. That is, we will address the question of which lowers volatility better - the SIP or a lump sum. If the SIP is done for a year or so, then we usually call it an STP.

I have shown several times before that a SIP does not reduce investment risk in any way:  Beware of Misinformation: Mutual Fund SIPs Do Not Reduce Risk!

Mutual fund houses and their sales guys aka "advisors" want you to believe just that because the SIP is a fantastic way to guarantee a regular income.

Let us see yet another proof of this.

Lump sum vs SIP: 11 years

Month after month returns (CAGR for a lump sum and XIRR for SIP) are shown for investments in Quantum Long Term Equity Fund from April 3rd 2006.

lump sum vs SIP investing mutual fund

Obviously, no one will invest a lump sum they received in April 2006 as an SIP for the next 11 years. From that point of view, this graph makes no sense. I only wish to drive home the idea that "over the long term",

(1) the risk of a lump sum and that of a SIP is not very different. For the above case, this is true even over the short term.

(2) We are all dead

Lump sum vs SIP: 1 year

If we now jump to the other extreme for a SIP and lump sum started on April 3rd 2016, we get the following picture.

Please do not waste your time worrying about: which offers better returns - lump sum or SIP/STP. That will depend on market movements. For example, if we could foretell, the market will move up by 40% in the next year and you have about a Lakh to invest, will you dump it all in or do an STP worried about volatility?

On the other hand, if on the other hand, we could foretell that the market will only move up and down for the next year, how will you invest that one lakh?

The point is, that we cannot foretell and therefore do not know whether a lump sum is better or a SIP/STP.  It is only in hindsight that we can know and is not of much use.

If you have a lump sum and want to know how to invest it, please consider reading: How to invest a lump sum in an equity mutual fund?

Now to complete this post, let me post some more pictures and will leave the impressions to you.

Lump sum vs SIP: 3 years

Lump sum vs SIP: 5 years

Lump sum vs SIP: 7 years

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16 thoughts on “Lump sum vs SIP investing in mutual funds: Which is “better”?

  1. Rajesh

    Testimonial - Done Prof.Pattu (probably the first time I did such a thing, but I am glad I did it for freefincal). Thankyou so much for enlightening us readers. Kindly keep sharing.

    Reply
  2. kalyan

    I do not have a face book account and therefore I cant post the Testimonial I wrote. THis is for you to read.

    From the time I discovered Pattu's FreeFincal, it has become a "GO TO" place for me for any matter connected with Personal Finance. I expect here, "Yatha-Bhoot-Gyan-Darshan" that "to see reality of financial matters/schemes/products/ratings as it is". Practical, Grounded, Data and Graphics based analysis and yet no hand holding or spoon feeding. A truly DIY training available here for the ones who wish to take the path. Should you happen to pass by our home at dinner time, on some evenings you are likely to hear, "Pattu says that there is no difference between SIP and Lump Sum and he shows it graphically" or some such thing. The best tool I acquired at FreeFincal is the understanding of Standard Deviation.

    Reply
  3. Yogesh anand

    Lump sum is risky for guys who dont hve equity knowledge .thy may invest lump sum when market was at pick where as in case of SIP thr is no such issue.thy can remain free mind

    Reply
    1. freefincal

      I don't expect such people to ask this question. Unfortunately, even a SIP will not help much other than psychologically.

      Reply
  4. Seetharaman

    Tried to write a testimony, but the Login says for Bloggers only. How and where to leave the comments on the website?

    Reply
    1. freefincal

      Thank you. You don't need to log in. Just need to login into Facebook (if you have an account) and write a comment there like others have done.

      Reply
  5. Ramesh

    SIP contributions are made in future cash terms whose present value will be considerably less.
    I am of the opinion that SIP allows you to dollar cost average the entry points, which definitely averages the net price per unit of the asset.

    In this case, a lumpsum if put in a liquid fund with periodic transfers (STP) gives better risk adjusted returns.

    Please confirm if you have a different opinion.

    Reply
    1. freefincal

      I trust data over opinions. There is no credible evidence to show that STP is better than lump sum for the long term investor. See the links in the post.

      Reply
  6. Pradeep

    Sir,
    Lumpsum vs STP question generally applies to newbie investors for 2 reasons, 1) they may have decent amount of money lying in bank account and they decide to invest one day. 2) they are quite new to equity investing.
    So I guess for them it's as important as asset allocation to everyone.
    Returns might not be significantly different in case of STP but peace of mind will be better. I guess not everyone will feel bad if they miss a bull market by not investing lumpsum but most will feel bad if the market tanks 50% after investing lumpsum.
    STP any day for newbies, anything for seasoned investors who already have a few lakhs invested

    Reply
  7. Manish

    It is not true, there are lumpsum funds available due to asset sales, maturity of other investments, profit sharing/bonuses in certain cases, even pure procrastination leads to lump sum accumulation !

    Reply
  8. Chaitanya

    My sincere Apologies for not writing the testimonial Professor. For some reasons I could not use Facebook and cannot register in Indiblogger as I am not a Blogger.

    "Without your Articles and Advice, my Financial journey would have been tough. Thank you for making it Easy and Beneficial."

    I wholeheartedly wish you win the Award.

    Reply

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