SIP vs Lump Sum: Which Investment Strategy is Better?
SIP
SIP, or Systematic Investment Plan, is a method of investing a fixed amount of money regularly into mutual funds. Many investors follow this approach, but a common question arises: How does SIP generate returns? To answer this, we will analyze real historical data.
Analyzing Historical Data
To understand how SIP performs over time, I extracted data from the Association of Mutual Funds in India (AMFI) for this case study, for Parag Parikh Flexi Cap Fund (Direct Plan - Growth). I collected data from May 28, 2013, when this fund was launched, up to June 28, 2021. Initially, the Net Asset Value (NAV) of this fund was $9.992, and by July 27, 2016, it had increased to $18, almost doubling in three years. By July 2021, the NAV had grown to $45, meaning it had increased 4.5 times in about eight years.
Calculating SIP Returns
Let’s assume a monthly investment of $5,000 in this fund. If an investor had started SIP on May 28, 2013, investing $5,000 every month, they would have invested a total of $490,000 by June 2021. The value of this investment would have grown to $1,160,000, which means the investment more than doubled. If the SIP amount was $10,000 per month, the total investment of $980,000 would have grown to $2,300,000.
Choosing the Right SIP Plan
There are two types of SIP plans: Regular Plan and Direct Plan. Regular Plan includes commission costs, as investments are made through agents or banks. However, Direct Plan has no middlemen; investments are made directly with the fund house, leading to lower expense ratios and higher returns. It is advisable to switch from a regular plan to a direct plan to maximize returns.
Lumpsum vs. SIP Investment
Lumpsum investments can be risky if done at the wrong time. If the market falls, the investment may lose value significantly. A better approach is to invest a lumpsum amount into a debt mutual fund and transfer a fixed amount into an equity mutual fund SIP regularly. This reduces risk and allows better market participation.
Disclaimer
This article is for informational purposes only and does not constitute financial advice. Investing in stocks involves risks, including the loss of principal. Always do your own research or consult a registered financial advisor before making investment decisions.
