Is SIP mode of investment always better than lump sum investment?

Suppose I invest Rs2000 monthly in a mutual fund (growth option) for two years and someone else invests Rs48000 in the same fund at the same time I start investing. Who is going to have better return? I feel since NAV will generally increase with time, the second person gets more number of units since he buys at a cheaper rate and will get better return at the time of redemption (units bought at cheaper rate, sold at higher rate). Do you agree with this view?
Of course there may be small fluctuations in NAV but I think this is not too large to make SIP mode more profitable in the long run in a growing economy. I am confused about utility of SIP. What is your view?

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6 Replies to “Is SIP mode of investment always better than lump sum investment?”

  1. Studies have proven that the second person who invests the whole amount all at once will get a better return in almost every case. The only time when that would not be true is just before a major market crash like we had in 2008-9.

    A systematic investment plan is advantageous when one has a steady income and can only invest a small amount each month. It’s a great way to save, but if you have a large lump sum, there’s no advantage to taking years and years getting invested.

  2. A person investing in lump sum will get the best returns if the NAV keeps rising from the time he invests.

    He will also loose the maximum if the NAV keeps falling.

    By investing via SIP , one can avoid the worst situation. In the long run it is always safer to invest via SIP.

    If the market falls , you are automatically buying more units and if the market goes up , you are automatically buying less units . This way you are buying at an average price.

    For most of us who are salaried , SIP gives a discipline.

    Lump sum investment can make us greedy or install fear if the market falls.

    This does not mean you should not invest lump sum.

    Invest at least 75% via SIP and keep 25% to invest in lump sum or 2 or 3 installments whenever there is a big fall.

  3. Most people are paid either monthly or twice a month so a systematic investment plan is the way to go. Of course a given amount of money invested in a lump sum is always going to do better than that same amount divided into several monthly investments. If you really want to compare the two then figure out how many months you have till retirement and discount the monthly investment you could make over that period to a present value and ask yourself if you have that much money right now to invest? If you do, go ahead and make a lump sum investment.

    SIP’s are better cause you realistically don’t have the money to make a comparable lump sum investment.

  4. Investing a fixed amount every month is safer because you are not liable to invest your entire savings one day and lose it the next (in the event of a crash). Using your example, let’s say that you invest monthly and your friend invests all at the beginning. Now imagine the market went downhill for those two years. Who ends up with less equity? Your friend does.

    Investing all at once can be profitable, but most people who don’t want to spend much time studying the market or timing it will feel better off using an SIP. The best time to invest it all is when the market has already crashed and has bottomed out. It will eventually come out of hole and you will end up making a lot of money when prices stabilize. However, who knows when the next crash will occur? You could save your money and wait for a crash, but what happens if you get to retirement age and a significant market crash has not occurred? Then you have just been sitting on money that hasn’t been invested for years and it will be depreciated by inflation, not to mention you have lost all the gains you could have made through investment.

    EDIT: In the long run, SIP will basically always be the better strategy.

  5. sip mode is just for minimizing our risk.. if we invest at one single go then we can yield higher profit or loose everythin.. but if we invest in sip it will reduce our risk ..

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