What is best? SIP or lump sum

When markets are on the rise, investors face a different kind of challenge. Short-term profits become a lot easier than long term investing strategies, but mutual fund investors have a different challenge. For them, the choice is between SIPs and lump sum investments.

If one were to go by the last 12 months' performance, it might be tempting to go for SIP option as those who continued with their SIPs are sitting on handsome profits. In fact, the returns for these investors have been better than lump sum investments made two years ago. While such a situation arises once in 6-7 years, any investor would hate to let go of any profit making opportunity. However, lump sum investments or SIPs don't ensure profits at all times.

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For instance, a few SIPs in the last one year have managed to churn out annualised returns in the range of 30 per cent, but the same doesn't hold at all times. No product can ensure sustained annualised returns of such magnitude at all times. So, the question is what should be the product of choice in a rising market?

SIPs for long term

If you are investing in a mutual fund for long term in excess of five years, SIP can be an automatic choice as it lets you take advantage of market volatility. History has shown that equity markets haven't had a bull run on a continuous basis for more than 3-4 years at a stretch. So, if you are building a corpus for education or marriage over a period of 10 years, chances are that you would come across at least one bull run and bear run during the tenure. This would let you take advantage of both markets though it would be more beneficial if you face boom time during maturity period.

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On the other hand, a lump sum investment can be advantageous in a rising market if the tenure for investment is less than three years. Though such a strategy is layered with risk, it offers the potential of higher returns. Take the case of current environment. The returns from debt products like fixed deposits are less attractive as interest rates have slipped to 6.5 per cent range for one year tenure. If you consider the tax component, on interest income, the effective yield would come down further.

Then can one consider a complete exposure to equity at current level? The answer is 'yes' to those who are not dependent on the corpus completely. As you would have noticed, the stock market has been gradually coming out of the woods, in the last two quarters and despite the intermittent corrections, the outlook looks promising at current levels.

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Hence, those with risk appetite can allocate their funds in favour of equity. The allocation could be in favour of a combination of front line stocks, mid-cap funds and balanced funds when the corpus size is higher.

As pointed out earlier, the strategy has the potential of risk but other options like debt, offers an effective yield, which is not highly lucrative. So, if you are targeting a return of 10-15 per cent, the current market should be able to fulfil your target even if the investment horizon is short-to-medium term. History has shown that rising markets can be rewarding even in the short term and at current levels, we seem to be at the beginning of an uptrend.

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Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment-consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuisances of Finance, which has attained a new look over the years. Besides being a columnist, Srikala has also been closely associated with some of the prestigious book projects.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com.

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