SIPs work best in the long haul, lump sum investments during a rising market.
Those looking to make profits in the equity markets rue the narrow range that restricts their gains. Even retail investors who invest through the mutual fund route find themselves in a dilemma. Does investing a lump sum amount accrue more profits than through a systematic investment plan (SIP)? Let’s look at the evidence.
Over the past year, the equity markets have been trading within a narrow range. In early May, the Nifty was trading at 5,278 points. Today, it closed at 5,486 points, an increase of close to four per cent in a year.
| SLOW AND STEADY OR IN ONE GO? Lump sum performance Amount invested: Rs1.2 lakh Purchase date: 10 May 2010 | ||
| Annual returns (%) | Current value (Rslakh) | |
| HDFC Top 200 Fund | 16 | 1.39 |
| DSP Blackrock Equity Fund | 12 | 1.34 |
| Fidelity Equity Fund | 15 | 1.42 |
| IDFC Premier Equity Fund | 15 | 1.37 |
| SIP performance (Investment from 10/5/10 to 11/4/11) Annual returns (%) | ||
| Amount invested: | Rs 1.2 lakh | HDFC Top 200 Fund | 7.90 |
| Monthly instalment: | Rs 10,000 | DSP Blackrock Equity Fund | 5.40 |
| Fidelity Equity Fund | 6.01 | ||
| Months: | 12 | IDFC Premier Equity Fund | 4.70 |
SIP VERSUS LUMP SUM
Suppose you had invested a lump sum of Rs 1.2 lakh on May 10 last year in HDFC Top 200 Fund, one among the top five mutual funds (MFs) in terms of assets under management (AUM). Annual returns, as on April 29, 2011, were 16 per cent. Another scheme, DSP Blackrock Equity Fund has given returns of 12 per cent in the same period.
Suppose you had, during the same period, taken the SIP route while investing in the same schemes. Paying a monthly instalment of Rs 10,000 (last paid on April 11), you would have got 5.4 per cent annually on your investments in the DSP Blackrock Equity Fund scheme. The SIP scheme of the HDFC Top 200 Fund has returned 7.9 per cent.
When you invest through an SIP, you stagger your investments through different market levels, systematically. That is, you invest a fixed sum either monthly or quarterly in an MF scheme. For example, you decide to invest Rs 5,000 every month or every quarter in an MF. You fix a date on which the amount gets invested, monthly or quarterly. A lump sum investment means you invest large amounts at a time, as and when you have a surplus.
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INVESTMENT PERIOD
But investments in SIPs will garner good returns only if you stay invested for long, says Hemant Rustagi, chief executive officer at Wiseinvest Advisors.
“One year is too short a period to expect very good returns on your SIP. If you stay invested for 10 years through the SIP route, in five years, your average holding period will add up to a sizable amount,” he says.
SIP works best when stock markets are volatile. The months where markets are down, you get more number of unit,s as the NAV is down and when the markets move up, you get less number of units.
“The overall price gets averaged out and increases your returns when you remain invested in SIPs for a long time,” says Vicky Mehta, senior research analyst at Morning Star.
RISING MARKETS
But your strategy needs to change in a rising market. Here, an investment in lump sum will give you a better return, unlike one via SIP. The reasoning: When you buy through SIP in a rising market, you purchase the units at a higher price.
But while making a lump sum investment, timing the market will be important. Lump sum investments bought at low levels and sold at higher levels give best returns. However, for a retail investor, timing the market is neither advisable nor easy.
Market men say that if you have surplus cash, it is best to have a combination of both. SIP will help you through volatile times and lump sum investments during the times that the markets are rising. Say you invest Rs 5,000 via SIP for a year and have a surplus of Rs 50,000 and the Sensex has dipped over 1,000 points, like it did last week. Then you should invest some of it in a SIP and some as lump sum.
But if you do not have that much cash with you to invest in both the options, go for an SIP. And, stay in for the long haul.