SIP or ....

Vivek Kaul

With the stock market down from its recent highs, one comes across a lot of half-baked analysis suggesting one-time investing is better than systematic investment plans (SIPs).

The primary reason for this may be the newspaper editors' craving for sensational headlines. Surely, "One time investment better than SIPs" makes for a much sexier headline than say "Continue with your SIPs." But, that doesn't quite make a good investment strategy any bad, or vice versa.

Let us consider four schemes, which have done very well over the last three years — Sundaram BNP Paribas Select Focus, SBI Magnum Contra, Kotak Opportunities and DSP Merrill Lynch India Tiger Fund.

Had you had started an SIP of Rs 5,000 every month in any of these schemes around three years back, you would have invested Rs 1.8 lakh (Rs 5,000 x 36 months) by now. You would have managed to accumulate around Rs 2.8 lakh by now, at an annual rate of return of around 30%.

Instead if you had invested Rs 1.8 lakh into any of the schemes on April 1, 2005, i.e. around three years back, your corpus would be anywhere between Rs 4.83 lakh and Rs 5.2 lakh depending on the scheme chosen.

Now, consider a situation where an investor started an SIP in any one of these schemes around one year back. An investment of Rs 5,000 per month would mean he would have invested Rs 60,000 over the year.

Now, in 2 out of the 4 schemes, he would have lost money. In comparison, had he made a one-time investment in any one of these four schemes, the value of his Rs 60,000 would be anywhere between Rs 80,000 and Rs 84,400.

Clearly, over both three-year and one-year periods, one-time investments would have worked better than SIPs. So why are we suggesting that SIP is the better option?
Let us sample the reasons.

First, you would agree that an individual has a better chance of investing Rs 5,000 every month, compared with putting in Rs 1.8 lakh at once.

Second, the SIP investor has also earned a return of around 30% per year and that is not bad by any stretch of imagination when compared with other modes of investment in the market.
Third, one-time investing works very well when the market is on its way up, as it was for the last three years, until the slide began. Thus, all the news highlighting the better performance of one-time investment vis-à-vis SIPs has the benefit of hindsight.

Now, let us take two investors, one of whom invested Rs 60,000 and the other Rs 1.8 lakh on January 8, 2008, when the stock market peaked. The investment of Rs 60,000 in any of these schemes would currently be valued anywhere between Rs 39,000 and Rs 43,000 a loss of around 33%.

Similarly, Rs 1.8 lakh invested in any of these schemes would currently be valued anywhere between Rs 1.19 lakh and Rs 1.24 lakh.

Now tell me, who would be better off? An investor who puts in Rs 5,000 every month over a period of one year or three years, or one who invested Rs 60,000 or Rs 1.8 lakh at one go, on the day the market peaked?

To reiterate, one-time investing works very well when the markets are going up. But, does anyone really know how long they will keep going up, or for that matter, whether they will from a certain point? Nobody does, for sure.

This is why it makes sense to keep investing in mutual funds regularly through the SIP route.
SIPs also help the investor buy more units in a falling market and thus decrease the overall cost of purchase of each unit, a phenomenon known as rupee cost averaging. Needless to say, that benefit is not available to the one-time investor.