You must have heard at least a hundred times that Systematic Investment Plans (SIPs) are better than lumpsum investments when it comes to returns. Here is the thing - SIP returns are not always better than lumpsum investments. SIP-ping is many things, but not a guarantee for better returns. Not convinced? Let’s look at figures to prove it.

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The one-year SIP returns of 97% of equity funds are actually lower than lumpsum investments done one year ago in the same funds. Did you say, one year is too short a period? Well, three-year SIP returns of 87% of equity funds are also lower than lumpsum investments done three years ago in the same funds. The trend also holds when it comes to five years. DNA Money spoke to fund experts to understand what is happening and what’s the future.

SIP pe charcha

Indians have woken up to SIP like never before. It’s like a new brand of tea that everybody wants to taste. Agreed, SIPs have certain inherent advantages.

One, they allow you to invest a fixed amount in a mutual fund scheme periodically at fixed intervals. That works well if you don’t have a lumpsum investment.

Two, the SIP installment could be as little as Rs 500 per month. Ordinarily, you can’t buy even one share of some great quality firms. But a Rs 500 SIP theoretically allows you to participate in the same stocks that legends like Rakesh Jhunjhunwala invest in.

Three, SIPs allow rupee cost averaging, which means your average cost is low because you keep on buying units at a far more regular frequency. Hence, you accumulate more units at a lower cost on an average.

Plus, it brings in discipline and you do not worry about timing the market. Naturally, the number of mutual fund SIP accounts has raced to 2.44 crore and is regularly bringing in over Rs 7,000 crore money every month for the MF industry.

Lumpsum investment usually works for those who regularly track the markets, are able to predict market movements and time their investments accordingly. More importantly, lumpsum investments is a choice only for those who have large investible surpluses.

“For most investors, SIPs is a more realistic option. It also enforces regular and disciplined investing from your monthly income. It also does away with the need for market tracking or timing, which is difficult for majority of retail investors and, hence, not advisable. By entering the market in smaller amounts, SIPs allow the investor to benefit from market upsides as well average their investment cost during market corrections,” said Manish Kothari, director & head of mutual funds, Paisabazaar.com.

Optimal tool, but not for returns

We looked at hundreds of equity funds to see how SIP returns (done on the first of every month) shape up against lumpsum investments at different periods. The lead in favour of lumpsum strategy is quite big in many cases, with lumpsum returns 10-20% points higher than SIP across one year. Overall, one-year lumpsum returns in 353 of 364 funds are higher than SIP strategy. The gap is not a one-year phenomenon.

Those who had done SIP for three years can see the same trend. In many equity funds, lumpsum investments have given 5-10% points more than SIPs in three years. Overall, the lumpsum strategy has won in 282 of 326 funds in three-year time period. In the last five-year period, lumpsum strategy in 261 of 283 funds has beaten SIP returns.

Experts feel much depends on the period that one takes to compare. “For example 2011-15, the five-year period would have seen SIP do significantly better than lumpsum, as the volatility in-between was well-captured in an SIP. The larger point here is that SIP is not meant to be a tool to generate superior returns to lumpsum,” said Vidya Bala, head, mutual fund research, FundsIndia.

In a rising market, lumpsum investments in mutual funds register higher returns than SIPs. Lumpsum investment is a one-time investment, whereas SIPs involve periodical investment at monthly or quarterly intervals. “Hence, the cost of purchase of a lumpsum investment in a rising market would always be lower than the average cost of SIP. As equity markets have registered significant gains over the last five years, lumpsum investments have generated higher returns than the SIPs,” explained Kothari.

Give more years to SIP

Some experts feel that the concept of SIP is for the long term. When they say long term in equities, they mean seven to 10 years of investments. Abhinav Angirish, founder, Investonline.in says: “SIPs work on averages. If you are a SIP investor for five years, it means on an average, you are invested for a period of 2.5 years, which is anyways not enough. There is no point even discussing one year of SIP, as it a very small period.”

Many SIPs helped buy MF units over the higher end of the curve. “SIPs are to overcome steep market fluctuations (either side) and generate moderate returns blended with disciplined investing. Over the last 15 years, equity SIPs have given an average of 20% IRR, which are more than any other asset class,” argued Angirish.

SIP investors with a long-term horizon would surely benefit from market correction. SIPs will buy them units at lower Net Asset Values, which will reduce their investment cost and thereby, generate higher returns, in the long run, said Kothari.

The SIP strategy cuts chances of losses far more consistently. “No doubt over 10-year periods or more lumpsum should and does outperform. However, in shorter time frames of three, five, seven years and so on the volatility between two points are better captured by SIP. Why take these periods? Because chances of equity delivering negative point-to-point returns exists. But in a SIP this is far diminished and in fact nil over a five-year period or more,” said out Bala.

The very idea of SIP is not to time the market. Hence, instead of worrying about when the averaging will happen, investors should focus on the savings needed to reach their goal.

Source: DNA Money