Systematic Investment Plan vs. Lumpsum Investment: A Comparative study across Time and Indexes

Abstract

Introduction: SIP is based on the logic of rupee cost averaging wherein regular periodic investments are made (generally monthly) as LI which means one time investment There is always a debate between active and passive investing. Even though some active investors might outperform passive investors, there will be balancing underperformers as well. Considering transaction cost and risk adjusted returns passive investors tend to outperform the active investors over the longer time horizon.

Objectives: This paper compares success of two popular methods of passive investing that could be used by retail investors for investing in Indian stock markets viz. Systematic Investment Plan (SIP) vs. Lumpsum Investment (LI). The paper calculates risk and return for buy and hold strategy for the period of 5 ,10 and 15 years in various indices.

Methods:The study was based on monthly data for seven indices over a period of 20 years from 1st October 2004 to 1st October 2024. There were four broad-based indices viz. Nifty 50, Nifty 100, Nifty 200 and Nifty 500. The other three were sectorial indices viz. Nifty AUTO, Nifty BANK and Nifty FMCG. They were evaluated on various time frames of 5 years, 10 years and 15 years. The evaluation parameters were Extended Internal Rate of return adjusted for investing time (XIRR) for SIP and Compounded Annual growth rate (CAGR) for LI. The two methods were evaluated based on Maximum, Minimum, Average, Standard deviation, Variance of XIRR and CAGR numbers. Comparative analysis was done using t-Test: Paired two Sample for means. The papers cover various market cycles and investment horizons commonly recommended for retail investors.

Results: Out of the 21 combinations of (3 timeframes * 7 indexes) SIP was better than LI in terms of risk related parameters in 19 combinations. However, in terms of returns there were many combinations wherein LI was better than SIP. Contrary to the popular belief, there was no conclusive evidence that SIP was better than LI particularly for large cap index like Nifty 50 and defensive index like Nifty FMCG across timeframes. For the timeframe of 5 years and 10 Years SIP was better as compared to LI for Nifty 200, Nifty 500, Nifty AUTO and Nifty BANK index. However, based on returns and absolute amount LI was better as compared to SIP investment.   

Conclusions: Passive investing in Index funds is highly recommended for retail investors because of transaction costs in Indian mutual funds. In the case of index funds, they can choose broad based funds or sectorial funds based on their risk appetite and time horizon and SIP or LI as a style of investment.