Skip to main content

Why SIPs score over lump sum investments?

Image
By

Why SIPs score over lump sum investments?


 
Systematic Investment Plans (SIPs) are not magic. Their superiority to lump sum investments is a matter of probability or even psychology and not an absolute law. What this means is that, most of the time, under most circumstances, over a sufficiently long period of time, SIPs will do better.

To understand this, one just has to review what a SIP is and what it does. SIP is a regular investment in a fund of a fixed amount at a fixed frequency, generally monthly. SIPs neatly solve the two main problems that prevent investors from getting the best possible returns from mutual funds.
Firstly, since SIPs mean investing with a fixed sum regularly regardless of the NAV or market level, investors automatically buy more units when the markets are low. This results in a lower average price, which translates to higher returns. If you invest a large sum at one go, you could end up catching a high point of the equity markets. This would mean that you have invested at a high NAV and that would reduce your gains if the market falls. An SIP is a good way to invest at an average price over a period.
Secondly, SIPs are also a great psychological help while investing. Investors inevitably try to time the market. When the market falls, they sell and stop investing. When it rises, they invest more. This is the opposite of what should be done. An SIP puts an end to all this by automating the process of investing regularly. It eliminates the mental load of deciding when to invest and leads to better returns.
It's clear from the first point above that while a lump sum investment could catch a high point in the market, it could also coincidentally catch a low point. This would make it superior to SIPs. In a generally ascending market, of the kind from 2003 to 2008 or the kind we have for the past one year, SIPs are almost always better for periods over a year or so. In a drifting equity market, this is not always true.
However, investors should also see that the second point above, about psychology, is the one that gives SIPs much of their value.

Comments

  1. Phani KumarJuly 30, 2020 at 3:30 PM

    Hey, thanks for the information. your posts are informative and useful.
    IRCON International

    ReplyDelete

Post a Comment

Popular posts from this blog

By
Building Your Go to Market Strategy When you introduce a product or service to a new market, there’s always going to be some risk. Over 30,000 new products are introduced every year, but 95% of new products fail. You don’t want to spend time and resources on a go to market plan that’s going to fall flat. A comprehensive go to market strategy acts as a roadmap, helping you research your market, position your brand, and unveil your new product or service. But before we look at how to build a go to market strategy framework, just what is “go to market” and how do you build a strategy around it? What Is a Go to Market Strategy? So, what does “go to market” mean? A go to market strategy (sometimes called a GTM strategy) is a plan of action that lays out how your company will reach customers in a new target market and gain a competitive advantage over other players in that market. It can also refer to how you’ll reach customers in an existing market with a new produ...
1 comment
Read more

Things you should know before investing in IPO

By
If you have bought an IPO for the company, you are exposed to the fortunes of that company. You bear a direct impact on its success and loss It is this asset of your portfolio which has the highest potential to reward the returns. On the flip side, it can sink your investment without a sign. Remember stocks are subjected to the volatility of the markets You should know that a company which offers its shares to the public is not indebted to reimburse the capital to the public investors You should weigh up your potential risks and rewards before investing in an IPO. If you are a novice, read up an account from an expert or a wealth management firm. If still in doubt, talk to your personal financial adviser.                                                                             ...
1 comment
Read more

Reality versus Fantacy

By
Reality 🆚 Fantacy If a friend with little farming experience told you that he planned to feed himself with food grown on a quarter-acre (1,000 square meters) plot, you’d expect him to go hungry. One can squeeze only so much from a small piece of land.There is, how- ever, a field in which grown-ups let their fantasies fly—in trading. A former employee told me that he planned to support himself trading a $6,000 account. When I tried to show him the futility of his plan, he quickly changed the topic. He was a bright analyst, but refused to see that his “intensive farming” plan was suicidal. In his desperate effort to succeed, he’d have to take on large positions—and the slightest wiggle of the market will quickly put him out of business. A successful trader is a realist. He knows his abilities and limitations. He sees what’s happening in the markets and knows how to react. He analyzes the markets without cutting corners, observes himself, and makes realistic plans. A professional tr...
Post a Comment
Read more