Comparative Analysis Of Lumpsum Investing Vs Systematic Investment Planning In Passive Investing

We use two methods in mutual fund investing, known as lumpsum investing, where we invest a fixed amount in a mutual fund and another by monthly equal payments, which is very popularly known as Systematic Investment Planning (SIP). In this, we invest in actively managed funds by fund managers and passive funds, which mimic the performance of benchmark indices as it is with a difference of transaction cost.

A study shows that SIPs outperformed lumpsum in index funds in 3 and 5-year periods if we compare the CAGR of NIFTY benchmarks through both the modes mentioned above of investment lumpsum and SIPs over a 1-year, 3-year, and 5-year period.

This reveals that investing through SIP gives better returns over a 3-year and 5-year period. The benchmark indices considered are the Nifty 50 TRI, Nifty 100 TRI, Nifty Next 50 TRI, Nifty 500 TRI, and Nifty Large & Midcap 250. The data we have cosidered is from July 2024, analysing on random period basis.

1-Year Returns

When we compare the 1-year returns of SIP investments to lumpsum investments, SIP investments consistently yield higher returns across all benchmarks. For example, the NIFTY 50 TRI benchmark shows a 34.12% return for SIP investments versus a 27.87% return for lumpsum investments. This trend is also evident across other benchmarks, such as NIFTY 100 TRI (41.46% SIP vs. 33.95% lumpsum) and NIFTY 500 TRI (46.44% SIP vs. 40.05% lumpsum). 

The Nifty Next 50 TRI and NIFTY LARGE MIDCAP 250 TRI benchmarks show the most significant differences, with SIP investments outperforming lumpsum investments by 16.73% and 5.08%, respectively.

3-Year Returns (CAGR)

Over three years, SIP investments' compounded annual growth rate (CAGR) also outshines lumpsum investments. For instance, the NIFTY 50 TRI benchmark yields 20.91% for SIP investments, compared to 17.37% for lumpsum investments. The NIFTY 100 TRI and NIFTY 500 TRI benchmarks display similar patterns, with SIP returns at 23.14% and 26.8%, respectively, while lumpsum returns at 18.33% and 20.68%. 

The Nifty Next 50 TRI and NIFTY LARGE MIDCAP 250 TRI benchmarks further emphasise the advantage of SIP, showing SIP CAGRs of 37.07% and 30.39%, compared to lumpsum CAGRs of 24.07% and 23.25%.

5-Year Returns (CAGR)

The long-term analysis over five years continues to favour SIP investments. The NIFTY 50 TRI benchmark returns are 20.89% for SIP investments, compared to 17.6% for lumpsum investments. Similarly, the NIFTY 100 TRI and NIFTY 500 TRI benchmarks show SIP returns of 22.12% and 25.32%, while lumpsum investments yield 18.34% and 20.82%. 

Notably, the Nifty Next 50 TRI and NIFTY LARGE MIDCAP 250 TRI benchmarks highlight the significant edge of SIPs, with returns of 29.91% and 28.72%, respectively, compared to 23.31% and 23.08% for lumpsum investments.

Let us look at the tabular data to know more.

SIP Investment:

Lumpsum Investment:

Data As of 15/07/2024

If you have invested lumpsum money on the dips of the bear market, you might have received higher gains than the SIP investments. However, for long-term investments that are not aimed at just timing the markets, SIP tends to perform better, as an investor receives more units of the fund when the NAV goes down and fewer units when the NAV goes up.

Conclusion

Overall, SIP investments provide superior returns across all time horizons compared to lumpsum investments. This is especially evident in benchmarks with more significant differences, such as the Nifty Next 50 TRI and NIFTY LARGE MIDCAP 250 TRI. SIPs are advantageous due to their ability to average out the cost of investments over time, reducing the impact of market volatility and leading to higher returns in the long run.

Disclaimer: The article is for informational purposes only and not investment advice.