This is a standard question I always have regardless of how many articles I read. Everytime the market falls and subsequently picks up, I hit myself on the head and say "I should have pumped in funds via lumpsum on the day the market tanked". Hindsight is always 20/20, but I wanted to test the SIP vs lumpsum question myself
So I did some analysis using the same data I had downloaded for the blogs I wrote on direct vs indirect funds.
Using the same two funds i.e. HDFC Balanced Advantage Fund and Nippon India Small Cap fund, I created two scenarios:
One - I invest INR 2.5K every 1st of the month, and Two- I invest INR 30K every 31st March. I used period of investment as 1-Feb-2013 to 31-Mar-2022. The outcome was not surprising. Monthly SIPs out-performed the annual lumpsum option as of 31-Jan-2023. The numbers looked like this:
​ | HDFC Balanced Advantage | Nippon India Small Cap |
Total investment amount | INR 2,75,000 | INR 2,75,000 |
Scenario 1: Lumpsum every 31 March - investment value | INR 5,93,287 | INR 9,25,617 |
Scenario 2: Monthly SIP on 1st - Investment value | INR 6,23,939 | INR 10,48,242 |
Delta of Scenario 2 over Scenario 1 | 5% | 13% |
Of course, one could argue (and I argued to myself) that I really compared a monthly SIP to Annual SIP. Which is what I really did. If I had the INR 2,75,000 to invest upfront on 31 March 2013, I would have been much richer than the SIP route.
To drive home this point, here is what I saw: INR 2,75,000 invested in Nippon India Small Cap fund (direct of course) gave me ... hold your breath! INR 29,59,604 . Let us call this Scenario 3!
Sounds large right? But the fact is - I cannot compare the SIP and lumpsum investment based on absolute returns simply because in the SIP, I was putting in money in small bits over a long period of time. Comparing absolutes is like comparing apples and oranges and saying they are not the same!
So I looked at XIRR. XIRR is the intrinsic rate of return when there are multiple inflows or outflows in a series of transactions.
In other words, blah blah blah - basically use XIRR when you have uneven cashflows at different points of time. I am yet to find a great cartoon video for XIRR, but i found this one for IRR which is nicely done.
XIRR table:
​ | HDFC Balanced Advantage | Nippon India Small Cap |
Scenario 1: Investing 30K on each 31 March | 15.23% | 23.91% |
Scenario 2: Investing 2.5 K on 1st of each month | 14.8% | 24.1% |
Scenario 3: Investing 2.75Lacs on 1. Feb.2013 | 13.57% | 25.6% |
So the table above gave me different outcomes than my earlier conclusion. My first conclusion was: Go for the monthly SIP in both funds. But when I do XIRR, we get a different answer!
So net net - In a growing market, Lumpsum investing is risky, but rewarding. In a stable market (Represented by the balanced fund), SIPs are better. But keep in mind - the XIRR is not dramatically different across all three of our scenarios. Is the delta worth analyzing and figuring out the best way of investing? Depends on how much time and effort you want to "invest"!
So why is this part 1/2? Because I want to experiment with trigger based investing rather than SIP or lumpsum. In other words, what if we could invest in funds when the markets went down only? Would that yield better results?
Watch out for that one. Should be up in a day or two.