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Lumpsum vs. SIP: Here's the Truth on the Winning Strategy for Mutual Fund Investors

Posted on 10 Nov 2024
Author: Sayan Sircar

Tags: Research ; Behaviour ; Mutual Funds

10 mins read
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This article helps you to decide for the last time which option is better for investing in mutual funds: SIP or lump sum.

Lumpsum vs. SIP: Here's the Truth on the Winning Strategy for Mutual Fund Investors

📚 Topics covered:

Defining SIP, SWP and STP
What is the purpose of SIP and whether a lump sum is better?
Why should we even think of splitting a lump sum over a few weeks or months?
What does the data say about lump sum vs SIP investing?
What does the lump sum vs SIP result for various categorises of mutual funds?
Should you invest as a lump sum or split the amount as a SIP if the market is near an all-time high?
When should SIP be preferred over lump sum

Defining SIP, SWP and STP

SIP SWP and STP

All of these are standing instructions that get executed as per a schedule you specify:

Systematic Investment Plan (SIP): Money from a bank account is invested into a mutual fund, typically once a month
Systematic Transfer Plan (SIP): Units from a mutual fund are redeemed to invest in another mutual fund of the same AMC
Systematic Withdrawal Plan (SWP): This is the reverse of the SIP. You sell the units from a mutual fund to send money to a bank account

Note: You do not invest in a SIP; you invest via one since a SIP is a standing instruction. You invest in a mutual fund, or basket of stocks, via a SIP.

Portfolio view for all goals

In the image above, SIP runs from years 1-17, and SWP takes over afterwards. However, STP may happen anytime in between for rebalancing purposes. We will explain the use cases below.

What is the purpose of SIP and whether a lump sum is better?

The asset management industry and every seller of mutual funds have one mantra that they want to drill into the head of the investor:

Start a SIP and never stop a SIP so that the SIP will create wealth

This concept of regular investing aligns nicely with all of us investors who are paid a salary every month:

salary comes in once a month
SIP amount gets deducted once a month

Investing in Your 40s and 50s: Why Lump Sum Beats SIP for Mature Investors?

There are however cases where a much larger sum of money needs to be invested. For example:

you sold a house, and you have ₹50 lakhs to invest
you sold RSUs and adjusting for withholding taxes, you have ₹25 lakhs that you need to invest in Indian MFs
you have never invested much before and now have one crore in FDs in different banks

This article provides a data-driven analysis of which approach is better for investing a large chunk of money into mutual funds:

at one go as a lump sum
equal amounts split over a few weeks to months as an SIP

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Why should we even think of splitting a lump sum over a few weeks or months?

The answer to the question of lump sum vs SIP is behavioural and has everything to do with this question:

What if the market falls immediately after you invest as a lump sum?

The obvious solution to this problem is splitting the lump sum over a few weeks or months by keeping the money either in the savings account or a debt mutual fund and run an STP to the risky equity fund of your choice. For the time being, let us leave aside the fact that once the whole sum is invested, whether at once or split over a few weeks/months, it will be fully exposed to the gyrations of the market.

We are therefore only concerned over the performance of the equity fund where the investment is being made over this brief period where the investment is being made. So, what we are going to do is that we are going to see if splitting this over this say 6 months or 6 weeks is better than investing at one go as a lump sum.

You have taken the data of some popular mutual funds, and we have seen using data since 2013 that which is better a lump sum which is at one go or a SIP over let’s say 6 months or 6 weeks. For the SIP case, we will run an STP from a debt mutual fund that gives 5% after tax annual return.

We have chosen the following popular mutual funds based on the assets under management using NAV data since Jan 2013 from AMFI website.

These fund names are NOT recommendations

Fund	Category
UTI Nifty 50 Index Fund	Index (Large Cap)
Parag Parikh Flexi Cap	Flexi Cap
HDFC Midcap	Midcap
ICICI Prudential Blue Chip	Large Cap
Nippon Small Cap	Small Cap
HDFC Balanced Advantage	Balanced Advantage
SBI Equity Hybrid	Aggressive Hybrid
ICICI Prudential Multi Asset	Multi Asset Fund

What does the data say about lump sum vs SIP investing?

We have created a simple plan:

first choose an investment frequency: weekly or monthly
dump the entire amount, say ₹20 lakhs, into an arbitrage (or liquid) mutual fund. Say you got 60,000 units of the fund
choose a number of STP instalments: say 6 (investment spread over 6 weeks or 6 months)
execute the STP where every week (or month whatever you have chosen), invest an equal number of units into the chosen equity fund. Since you had 60,000 units, on every STP date, redeem 10,000 units of the debt fund into the equity fund

Here is a chart where we have shown the performance of a lump sum in the Nifty 50 index fund vs an SIP (either weekly or monthly) as an STP from a debt fund (either arbitrage or liquid) of the same AMC. Lumspum vs Weekly or Monthly SIP

What this chart shows is that whether it is weekly or monthly, lump sum has made more money in at least 50% or more cases. This result is significant since in Finance, a probability of 50% or more, since most decisions are anyway yes or no (buy or sell, lump sum or SIP, etc), is a strong indication of a result that can be significant for decision making. The intuitive reason for this result is:

Stock markets go up over time: invest early.

We have assumed 5% post-tax return in the debt fund that gives a better result for the SIP case since without it, the lump sum will be even higher in relative value.

Have vs Needs Framework

You need to consider also that the entire amount that you have may not be required to be invested in equity. Amounts due for spending in the next few years should not be in equity at all. We have discussed this point in detail here: How to invest a lump sum amount for your goals?.

Also read
What returns should we expect from equity investing?

What does the lump sum vs SIP result for various categorises of mutual funds?

Here we have chosen a lump sum vs either a 6-week or 6-month SIP (run as an STP from a 5% post-tax debt fund)

Fund	Weekly SIP	Monthly SIP
UTI Nifty 50 Index Fund	57%	65%
Parag Parikh Flexi Cap	71%	85%
HDFC Midcap	64%	58%
ICICI Prudential Blue Chip	62%	65%
Nippon Small Cap	63%	69%
HDFC Balanced Advantage	58%	69%
SBI Equity Hybrid	67%	73%
ICICI Prudential Multi Asset	65%	81%

Here as well, the result is clearly showing that if you invest as a lump sum, irrespective of the fund category, it is more probable that the return vs. the SIP option will be more. For example, in case of the Flexi cap, the lump sum has made more than the 6-month SIP in 85% case.

Warning: Before using these results for making investment decisions:

the Indian market has been on a bull-run over the period 2013 onwards. For a brief period of falling markets, due to COVID in March 2020, has not really fallen much over the short-term
these results are probabilities. Your own case will be unique to that period and cannot be predicted in advance.

Should you invest as a lump sum or split the amount as a SIP if the market is near an all-time high?

One of the biggest worries that investors have about the stock market reaching an all-time-high is the fear that the market will fall soon. We have looked at average short-term (3-month and 6-month) returns in the Nifty 50 just after the ATH. The results are shown below.

Short-term Return from All-time-high

Based on this, have done this same analysis solely on the cases where the stock market is close to an all-time-high and the conclusion is explained here: How to invest a lump sum amount when the stock market is at an all-time high?

When should SIP be preferred over lump sum

Even after all of this analysis, there are a few behavioural reasons where and SIP is preferable:

when the investor has limited experience with the equity markets
when the quantum of lump sum is very high relative to total investment
there is an irrational amount of fear in the investor’s mind that the market will fall

In such cases, a method of choosing of splitting the amount into a small number of weeks or months up to 2 years may be chosen. It is important to keep in mind that irrespective of the period over which the SIP will run, once the whole amount is invested, it will be fully exposed to the ups and downs of the stock market. If the market falls 40% the month after you finished your SIP, the fact to used a SIP to reach this point will not prevent your portfolio from losing value.

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