SIP Vs Lump sum – Which is better in Mutual Funds Investing?

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I don’t like such questions. Is it better to invest lump sum or monthly SIP in mutual funds? A lot of people ask me such questions – whether SIP (Systematic Investment Plan) is better than lump sum investing in mutual funds in India? Or whether lumpsum investing is better than mutual fund SIP? Why I don’t like these questions (are SIPs better than lumpsum investments?) is because as usual, there is no one right answer here. There are shades of grey and it isn’t exactly an ideal comparison. People want to simply compare SIP vs one time investment in mutual funds or just want to find out which are top mutual funds for SIP in 2019 or best mutual funds for lump sum investment in 2019 and what not. But there are no perfect answers or ready lists that predict anything. And let’s look at it from a common-sense perspective. Before even getting into lump sum vs monthly investment debate, the decision to invest in lump sum or SIP depends on whether one actually has enough investible surplus that can be called as lumpsum! Right? If one doesn’t even have this ‘lump sum’ then this question of SIP or lump sum in itself is meaningless. It’s only when this ‘lumpsum’ is actually available that the question holds any relevance. And once the lump sum is there, the next question should be whether investing in one go is better or whether it’s wiser to spread that lump sum over a short period of time, as there can be several best ways to invest a large sum of money in mutual funds. Just because the lump sum is available doesn’t mean that the money should be invested in one go. There are can various other tactics to deploy it more efficiently. But nevertheless, there are those who prefer SIP (and have SIP success stories to tell) and there are those who prefer lump sum investing. And to be honest, both methods work in different set of circumstances. Let’s try to do this comparison as objectively as possible.

SIP vs Lumpsum in Rising (Bull) Markets

In a rising market, your lumpsum investments in mutual funds will produce higher returns than SIPs. That’s because the cost of purchase in a lumpsum investment in a rising market would always be lower than the average cost of purchase in SIP, which is spread out across higher and higher purchase prices for each SIP installment. Let’s take a very simple hypothetical example to show this. Suppose one investor invests Rs 5000 per month in a rising market for 12 months. While the other invests Rs 60,000 as lumpsum at the start itself. Both invest in mutual funds a total of Rs 60,000. Here is how it pans out over the next 12 months: As can be seen above, the average cost (average NAV) for the SIP investor in a rising market is higher. And hence, the future hypothetical profit when sold later, will be lower for the SIP than that of the lumpsum investor. Now let’s look at a falling market scenario.

SIP vs Lumpsum in Falling (Bear) Markets

In a falling market, the SIP investing would result in comparatively lower losses than that in lump sum. And that is because the cost of purchase in a lumpsum investment in a falling market would always be higher than the average cost of purchase in SIP. Here is how it looks: As can be seen, the average cost for the SIP investor in a falling market is lower. And hence, the future hypothetical profit when sold later, will be higher for the SIP investor than it is for the lumpsum investor. So basically what is happening is that if the market grows continuously, then lump sum investing gives higher returns whereas if it falls continuously, then SIP investing is

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