SIP Vs Lumpsum: What Works Best in Volatile Markets?
Markets have been experiencing heightened volatility in recent times, leaving many investors wondering how best to navigate these turbulent waters. Be sure to read this for a balanced perspective and the right approach.
The Nifty VIX — a barometer of market volatility — has spiked over 30 per cent in the past month, reflecting heightened investor anxiety. Initially fuelled by concerns over a potential global economic slowdown amid tariff tensions, the volatility has been further exacerbated by rising geopolitical tensions between India and Pakistan following the Pahalgam terror attack, coupled with uncertainty surrounding upcoming key U.S. economic data.
Market volatility is an inevitable part of the investing journey. But for mutual fund investors, this often raises a crucial question: Should one invest through Systematic Investment Plans (SIPs) or go for a one-time lumpsum investment during volatile times? Both strategies have their merits, but their effectiveness can vary depending on market conditions and investor goals.
Understanding the Basics
A Systematic Investment Plan (SIP) involves investing a fixed amount in a mutual fund at regular intervals—usually monthly. This strategy brings in the power of rupee cost averaging, where you buy more units when prices are low and fewer when prices are high, averaging out your cost over time.
On the other hand, a lumpsum investment is a one-time infusion of capital into a mutual fund. It allows investors to deploy idle cash immediately and is often preferred when markets are believed to be undervalued or at the start of a bull run.
The Case for SIPs in Volatile Markets
SIPs are particularly effective in volatile markets, where price swings create uncertainty. Regular investments spread over time ensure that investors are not overly exposed to short-term market highs or lows. This cushions the portfolio from sharp downturns and allows it to recover as the market stabilizes.
Example: Consider an investor who started a SIP of Rs 10,000 per month in an equity mutual fund in January 2020. Despite the market crash in March 2020 due to the pandemic, the SIP continued. As NAVs dropped, the investor bought more units at lower prices. When the markets rebounded in the following months, the accumulated units gained significantly. This consistent approach beat the returns of many who hesitated or invested a lumpsum just before the crash.
When Lumpsum Works
A lumpsum investment can outperform SIPs if markets are in a strong uptrend. It allows the entire capital to be exposed to compounding right from the beginning. Investors with high conviction in market recovery—post a steep correction or during policy-driven rallies—may prefer this route.
However, timing becomes critical in lumpsum investing. A wrong call can lock in capital at a high, leading to longer recovery periods.
Balancing the Two
In reality, a blended approach often works best. For instance, an investor receiving a bonus of Rs 5 lakhs may choose to invest Rs 1 lakh immediately (lumpsum) and the rest via a monthly SIP of Rs 20,000 over the next 20 months. This balances the benefits of immediate exposure and rupee cost averaging.
Conclusion
In volatile markets, SIPs offer better emotional discipline, reduce timing risk, and help build wealth gradually. Lumpsum investments, while potentially rewarding, require careful judgment and a higher risk appetite. For most retail investors, SIPs provide a more prudent and stress-free route to long-term wealth creation.
As the saying goes, “Time in the market beats timing the market.” And SIPs are built exactly for that philosophy.