Should You Invest Via SIP For Short Term?
Lump sum investment is good both for the short or the long term, but SIP is better for the long term.
The volatility in the equity market has not dented the spirit of the retail investors who continued to show their faith in mutual fund investment, especially those who have opted for SIPs (Systematic Investment Plans).
Indian mutual funds currently have about 2.59 crore SIP accounts. The data from AMFI (Association of Mutual Funds in India) show that the mutual fund industry had added on an average about 9.15 lakh SIP accounts each month during the FY2018-19, with an average SIP size of about Rs 3,125 per SIP account. Amount collected via SIP in the first eleven months of FY19 stood at Rs. 84,638 crore as compared to Rs. 67,190 crore in FY2017-18. So, the amount collected via SIP in FY2018-19 is 26 per cent more than FY2017-18, and there is still one month to go.
This shows that the penetration of SIPs have increased substantially in recent years. Apart from intermediaries, SEBI (Securities and Exchange Board of India) and AMFI have also played a considerable part in promoting mutual funds. AMFI in the year 2017 came up with “Mutual funds sahi hai” campaign, which is an investor education campaign to spread awareness about mutual funds. This campaign gained a lot of attention from the potential investors to invest in mutual funds, including investment via the SIP route. Taking advantage of the campaign, the intermediaries as well as AMCs (Asset Management Companies) started promoting mutual funds and specifically the SIPs as they are more sticky in nature.
All the financial advisors and other intermediaries started promoting SIP, explaining the concept and advantages of SIP. Even many of the investors gave a heartwarming response to SIP and started to invest via the SIP route. This was opted even by those investors who had a lump sum amount to invest. They started investing the lump sum amount in liquid mutual funds and then initiate STP (Systematic Transfer Plan) to other equity funds. However, while doing so, one of the important thing that was not considered was the time horizon. Investors started investing in mutual funds via SIP without considering the time horizon. But does time horizon really matter while investing in mutual funds via SIP? Does it make a difference if you chose SIP for investing for the short term.
Frankly speaking, time horizon is immaterial while investing via SIP route. Understanding it with some facts would be a good idea. Following table will show you some interesting facts about SIP and lump sum investments.
The above analysis is done assuming you would be investing via SIP or lump sum in large-cap funds, and to generalise it, we have assumed you had invested in Nifty 100 TRI (Total Return Index). So, if we look at the above table, we can say that lump sum proves to be better than SIP, especially in the longer term.
SIP and lump sum are two very different investment approaches, which makes their comparison futile. To prove this point, let us take an example. Ram invested a lump sum of Rs. 3 lakh in a bank FD (fixed deposit) for a period of 3 years at the rate of 6.5% p.a. and Laxman got a chance to invest in a RD (recurring deposit) that offered 8% p.a. He invested a sum of Rs 1 lakh per year for a period of 3 years. Now you may say that Laxman may have got more money at the end of the period as he is investing via SIP and even the rate of return is higher than Ram’s investment. So, if we look at the end values, then Ram got Rs. 6.62 lakh while Laxman got Rs 3.51 lakh.
This difference is because Ram’s full amount was invested for the entire period of three years. On the contrary, Laxman’s investment was not completely invested for the full term since he invested the money in small instalments.
What should you do?
The first thing to understand is that SIP and lump sum are the two ways of investing your money in mutual funds. If you have lump sum amount available, then invest lump sum; but if you don’t have lump sum amount to invest upfront, then invest via SIP route, may it be for one year or 10 years. SIP is the best way to make you a disciplined investor. In the short term, the risk with the lump sum investment is the possibility of catching the market high, while in the case of SIP you would have the benefit of rupee cost averaging. In whichever way you invest, lump sum or SIP, investing early is the key to long term wealth creation.
Let's assume there are two friends, both aged 25. They plan to invest Rs 5,000 every month for a period of 5 years and, on a monthly compounding basis, earn 8% p.a. The only difference is that while one starts investing immediately at the age of 25, the other starts investing at the age of 35 years, that is 10 years later. After five years of investment, both hold on to their investments till they turn 60. While both of them would accumulate principal investment of Rs. 3 lakh over a period of 5 years, the investment of the person who started investment at 25 years of age appreciates to over Rs. 54.68 lakh, while the investment of the second person who started later grows to only to Rs 25.33 lakh.
Even in the short term (3 years or less) there is no harm in investing via SIP. However, it is always better to do lump sum in the short term as, in the short term, we believe equity investment is volatile and investing in debt mutual funds would be a good idea. But due to prevailing tax laws and taxation characteristics of debt funds, lump sum investment would be wise. If you do SIP, then each SIP must complete three years to get tax-efficient returns from the investment in debt funds.
"When investing for long term, it doesn't matter whether you are investing via Systematic Investment Plan (SIP) or Lumpsum. The thing that matters is when you invest. Earlier you start investment better it is."