Should you go for SIP or lumpsum investment?
Systematic Investment Plan (SIP), also known as rupee-cost averaging (RCA) is the process of investing equal amounts into the mutual fund or even in any stock at regular intervals. The idea behind such strategy is to reduce the risk of investing, in case market falls immediately after your lumpsum investment and your investment sees a sharp fall in its value.
One of the most common ways of SIP is done by someone with regular income like salaried employees who issues standing instruction to their bank and every month a fixed amount is credited to the fund selected by you. In a different scenario, you can invest in a lumpsum, which means you can invest in one go.
Being a mutual fund investor if do have an option, which is better, SIP or lumpsum. The empirical evidence suggests that lumpsum investment has a slight advantage over SIP. If you invest a fixed amount at the start of every year, which you can call as lumpsum, the annualised returns generated will be higher if you had invested the same amount in the next 12 months in equal amount.
Given this historical perspective, why SIP is considered as superior investing strategy? One of the reasons why it has been promoted as a better strategy was due to its convenience. Once you gave a mandate to your bank to debit your account, you do not have to do anything. A fixed amount will get invested at a fixed interval. Nevertheless, you need to understand that such commitment of fund on the initial information of the market may not be rewarding in such a fluid market. Hence, investment based on subsequent market information is expected to perform better.
Moreover, since the start of 1980 till January 2018, out of 458 monthly returns, 57 per cent of time a positive return is generated, which means the market is mostly upward trending and hence it does not make sense to delay your investment as it will lead to opportunity loss.
What is also interesting and fascinating to note is that with an increase in volatility of monthly returns, the outperformance of lumpsum investment increases.
