You can invest in a mutual fund scheme in two ways- either by investing a lump sum amount or via a systematic investment plan (SIP). While the lump sum route is a single payment mode, under the SIP mode of investing, a fixed amount is deducted from your savings account at fixed intervals of time which can be daily, monthly,quarterly or semi-annually and is directed towards the chosen mutual fund scheme.
Which mode will give you better returns?
The answer to this question depends on the stock market conditions. The lump sum mode of mutual fund investment tends to give relatively higher returns than a SIP in rising markets. On the other hand, an SIP generally provides better returns than the lump sum mode in falling markets.
Let’s understand this better with the help of an example.
If you would have made a lump sum investment of Rs. 12 lakh in ICICI Prudential Equity & Debt Fund during rising markets over say, from October 1, 2013 to September 1, 2014, and a monthly SIP of Rs. 1,00,000 in the same fund during the same period, the lump sum investment would have given you better returns.
Lump sum return: Rs. 12,00,000 @ CAGR 52.58% = Rs. 17,68,466
SIP return: Rs. (1,00,000 X 12) @ CAGR 57.88% = Rs. 14,91,883
If you would have made a lump sum investment of Rs. 12 lakh in ICICI Prudential Equity & Debt Fund during falling markets say, over say February 1, 2015 to January 1, 2016, and a monthly SIP of Rs. 1,00,000 in the same fund during the same period, the SIP investment would have given you better returns.
Lump sum return: Rs. 12,00,000 @ CAGR -0.73% = Rs. 11,91,999
SIP return: Rs. (1,00,000 X 12) @ CAGR 0.58% = Rs. 12,03,204
(All the above data is as per the applicable rates of return. Source: Shah Financial Services)
Advantages of SIPs over lump sum investments
- Rupee-Cost Averaging: In SIPs, your investment is spread over time including rising and falling markets. Your money would buy fewer units of the mutual fund when markets are up and more when they are down. Thus, an SIP enables you to lower the average cost of your investment and reduce the risk of your investment. This is known as rupee-cost averaging.
- Power of Compounding: An SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is called the power of compounding.
- Less Stressful: An SIP investment is less stressful than a lump sum investment and may help you stay invested. Markets can be highly volatile and can induce you to withdraw your money in a panic, if you have made a lump sum investment. This effect is less intense in an SIP because your money is spread out over time.
10 Best SIP Investments in 2018-19*:
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns|
|ICICI Prudential Bluechip Fund||1.03%||10.89%||15.52%|
|DSP Tax Saver||-9.00%||9.58%||17.56%|
|Franklin India Equity Fund||-3.35%||7.38%||17.59%|
|ICICI Prudential Value Discovery Fund||1.92%||7.89%||21.50%|
|Axis Long Term Equity Fund||-0.55%||9.01%||21.37%|
|Reliance Tax Saver (ELSS) Fund||-17.57%||4.83%||18.77%|
|DSP Equity Opportunities Fund||-7.94%||10.39%||16.94%|
|Motilal Oswal Long Term Equity Fund||-9.11%||12.19%||_|
|Aditya Birla Sun Life Pure Value Fund||-19.39%||9.47%||24.55%|
|HDFC Equity Fund||0.86%||9.15%||17.06%|
*3 year/5 year returns are annualised. Data based on NAV of direct growth variant of schemes as on October 22, 2018.
You can read more the best SIP investments here.
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