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

Published: September 28, 2017 at 2:30 pm

Last Updated on

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.

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

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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

Do feel free to enter your thoughts in the comment form at the end of the post.

Something to read in the weekend: Swapnil Kende who is on the verge of becoming a SEBI registered fee-only financial planner writes about: Why Fee Only Model of Advisory (from an Adviser’s perspective)

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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