Will a lump sum investment beat a SIP over 15 years?

Published: October 30, 2021 at 8:39 am

Last Updated on December 29, 2021 at 6:08 pm

Sudip asks, “Dear Pattu Sir, Thanks to your advice we now have an office-study-group with 12 people discussing money management. One member claimed that over 15 years, a lump sum investment will always beat a SIP. Is this line of thinking correct? Can you please shed some light on this?”

I am delighted to hear you are part of a study group. Be it personal finance or any other subject, this has multiple benefits. See: How you can improve your financial life with an office study group. Of course, different people will have different views, and we should be discerning to stay focused.

Comparing a lump sum investment with a SIP investment is of little use. No one ever is just going to make one investment over 15 years! And the total amount of money invested via lump sum and via SIP will always be different. If you ask the wrong question, you will never find the right answer! Unless you stop and realise the problem.

Sure, I can easily compare SIP vs lump sum investment returns over 15 years in a few minutes. However, even if we do not start a SIP (or equivalently invest manually each month), we will not make one investment and stop for the next 15 years!

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Academics have been compared these two modes for decades to get degrees. They would compare a 12,000 USD lump sum investment with a 100 USD monthly investment over 180 months. Sure it makes numerical sense, but not practical sense. A guy who can invest 12, 000 USD in one stroke would invest a lot more over the next 180 months.

We have discussed how SIP “annualised” returns are computed: What is XIRR: A simple introduction. Whether we invest daily or weekly or monthly or quarterly or occasionally, they are all forms of dollar/rupee cost averaging.

A single lump sum investment’s annualised return can be computed with the standard “compounding” formulae. Although there is no compounding in mutual funds, we do this to compare returns with a risk-free instrument like a fixed deposit to determine if we have got the reward for the extra risk we have taken – aka risk premium.

This compounding formula, aka CAGR, is explained here: CAGR vs IRR: Understanding investment growth measures. For our purposes here, in the case of a SIP, let us appreciate that each investment we make will have its CAGR. When we compute the XIRR, we ask what CAGR I can choose that will be the same for all instalments? This number is the XIRR. The XIRR is an approximation, while the CAGR is exact, although it is a point to point measurement ignoring the journey.

CAGR illustration

So must appreciate capital market return computation is done in hindsight, ignoring the journey. Forget practicality; even technically, the SIP vs lump sum comparison is on shaky ground because, in SIP, each instalment is done at different market levels. The XIRR is a CAGR “average”. So it is an apple vs orange comparison, however way we look at it.

When people ask, “lump sum or SIP, which is better?” what they mean is, “I have some cash that I wish to invest; should I invest it in one shot or should I invest it little by little (STP) each?”. The answer to that is, “over the long-term, it does not matter!”. See: Investing a lump sum in one-shot vs gradually (STP) in an equity mutual fund (backtest results) Sometimes STP does better and sometimes lump sum. You cannot know how your investment choice will work in future!

This distinction is important because comparing 15-year lump sum returns with 15-year SIP returns is of little use. If you have a lump sum and wish to enter the market “gradually”, you will do it over the next 6-12 months and not over the next 180 months!!

15-year lump sum vs 15-year SIP returns

Let us make this comparison for what it is worth. We shall use Sensex monthly price data from April 1979 to Oct 2021. We need to add about 2% more to the returns to account for dividends, but since this component is missing on both sides of the comparison, it will not change anything.

We shall use this tool to get 15-year SIP, and lump sum returns: Mutual Fund SIP and Lump Sum Rolling Returns Calculators.

There are 327 15-year intervals possible, and the first five and last five data sets are tabulated below as an example. We use the same starting and ending dates for both SIP and lump sum investments.

From dateTo date15 lump sum rolling return15 SIP rolling return

Please do not conclude anything from the above! This is just a random sample. Let us look at the full data set.

Comparison of 15-year lump sum vs 15-year SIP returns for Sensex price data from April 1979 to Oct 2021
Comparison of 15-year lump sum vs 15-year SIP returns for Sensex price data from April 1979 to Oct 2021

The following observations can be made:

  1. Sometimes SIPs wins; sometimes lump sum wins. No one can tell which would win in the future. This observation can be applied to
  2. To be precise, lump-sum returns are higher for 173 out of 327 times – 52%. So just about a coin toss between SIP and lump sum.
  3. What would fare better depends on the endpoint. If the market momentum is high towards the end of the investment journey, a lump sum is likely to succeed. A SIP will fare better if the market falls or moves sideways towards the end of the investment journey. Naturally, there is no way of knowing what the future holds.
  4. SIP does not reduce investment risk or manage volatility in any way. On the date you choose to calculate returns, your will returns will be up if the market is up. If the market is down, your returns will be down. Myth Busted: SIPs do not reduce risk or enhance returns!

What should investors do? In summary, investors should first stop comparing apples with oranges. SIP or automated investing is the natural way for a salaried investor to choose. If the person gets access to a lump sum from time to time, they can invest it in one shot or spread it over a few months. It makes no difference.

Investing 3-4 times a year on random dates or when the market is down (or up) is also SIP investing over a long duration, like 15 years. There is no magical way to get better returns by deciding the investment date.

“just invest when you get the money with a goal-based asset allocation and don’t waste any time planning strategies or looking at market levels” is a simple mantra we recommend that everyone adopt.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)