Are you one of those many people, who keep having this doubt – Should I invest in Mutual funds as one time investment or as SIPs?
Don’t worry. All of us do have this doubt at many points of time while investing for our future goals. This doubt stems out because, all of us are exposed to so much of noise / information about markets, research, analysis, forecasts etc. At any point in time, there are certain set of people who are bullish and certain set of people who are bearish about the economy, growth & stock market.
Now what do we do, when we are in such dilemma? Resort to back testing of available data and try to decipher what this data refers to.
Here is one such kind of data, where I tried to infer what is right, what will work , what won’t work and tried to find out what is the best solution.
Before we begin with this, let me re-cap the Indian Sensex (Stock Market) History since 2003.
|Jan’12- till date||Bull|
So, what happens typically when we are in Bull phase, usual sentiments are very high and most of us try to participate in this bull run by investing more. Similarly, in bear phase, where everyone talks negative and shy away, again most of us will stay away from investing.
Now, for a minute think about it, if every year, beginning of January, you have 1 lakh rupees to invest. You have two choices to make, one is to invest entire money immediately into equity Mutual fund. Second choice is to invest over one year as SIP.
For simplicity sake, I have taken a well-known diversified equity mutual fund with long track record to check since 2004 till date, if you had invested it as one time investment OR as SIP over a period of one year and stayed invested till Jun’18 what have been the returns from these investments.
What do you think the data would have suggested?
|Year||One Time Investment||One Year SIP||Sensex|
In the above table, One time investment means, money invested in January that year and stayed invested till Jun’2018. One year SIP means, same amount invested over 12 instalments and stayed invested till Jun’2018.
What this data states is that highest returns were made, if you had invested in peak of bear market of Jan’09. Next highest returns are in the phase when markets were in bull run. So, what do we do? Should we invest in Bull or Bear market??
What we can also see from this data is that the returns are better if one has stayed invested for at-least more than 5 years.
Now, comparing between one time investment and SIP, there isn’t too much of difference in returns. Both are more or less on par with each other.
Out of 13 years, one time investments gave higher returns in 6 out of 13 years and SIP gave high returns in 7 out of 13 years. So, what do we do? Should we invest as one time investment or SIP??
My view point is, one time investment or SIP shouldn’t be a major dilemma. Invest as soon as you have surplus money and stay invested as long as possible.
The learnings that I derive from this data are as below :
- Timing the market is futile and waste of time.
- Investing as per asset allocation pattern and invest as and when the surplus money is available.
- Stay invested as long as possible.
- Don’t panic and react to market cycles.
- The most important aspect is to understand the market cycles only to know what returns to expect in coming years.
- Automate investing via SIPs as a hygiene and discipline from every month’s income. Invest whenever there is ad-hoc surplus money as per asset allocation plan.