Mutual fund: SIP or lump sum? - Part II

In Part I of this article we have explored myriad virtues of Systematic Investment Plan (SIP) over lump sum mutual fund investment - rupee cost averaging, limited volatility, investment discipline, limited initial amount required for investment etc. Herein we will see them in practice with an example using historical data.
 

Suppose investor A invests a lump sum amount of Rs. 48000 in Nifty Benchmark Exchange Traded Scheme (Nifty BeES) on start of July 2007. While investor B takes the SIP route and invests an amount of Rs 2000 in the same Nifty BeES on 1st trading day of every month starting July 2007. In this example we will explore how they will fare at the end of two years i.e 30th June 2009.

Nifty BeES is an exchange traded fund (ETF) that mimics the S&P CNX Nifty Index. Being an Index fund it is representative of general trends in Indian stock market. Moreover time frame of two years between July 2007 and June 2009 is used on purpose as this has been a very turbulent period in the market.

The following table shows the details of two investment modes:

Note:  Historical NAVs is taken from www.mutualfundsindia.com. NAVs are for the 1st trading day on every month.

Observations

• While both A and B has invested a total amount of Rs 48000 in the same fund, annualized return for SIP is 5.92% while lump sum investment has a negative annualized return of -0.27%. Annualized return is calculated using XIRR.
  

• SIP provides rupee cost average. Thus when the stock price is at peak (NAV of 621.33 in Jan 08) minimum number of units (3.22 units here) is received, while the same investment of Rs.2000 has fetched maximum units (7.39) when NAV is least (270.5 in Dec 08). 
  

• Rupee cost averaging reduces the average cost of units and increases the total number of units purchased. Thus in this example for SIP average unit price is Rs 408.23 and total unit received is 117.58. But in case of lump sum investment the average unit price is higher at Rs. 435.96 and gets a onetime 110.1 unit.

• One way of determining volatility in investment is to calculate drawdown. Drawdown is the peak-to-trough decline during a specific record period of an investment and is quoted as the percentage between the peak and the trough. Lets see what is the drawdown for our example. Note that in this example we have calculated investment value corresponding to NAV of 1st day on month only and not on daily basis, thus actual drawdown can vary. However, this is good enough to drive the point.

• In case of SIP investment valuation peak and trough are Rs 27102.8 (in Sep 08) and Rs 21710.34 (in Dec 08) respectively. Thus the drawdown is -19.89%. But in case of lump sum investment, volatility is relatively much more. Valuation peak and trough are Rs 68409.55 (in Jan 08) and Rs 29782.54 (in Dec 08) respectively, which gives a downturn of -56.46%

Caveats

• SIP is a mode of investing in mutual funds and not the only factor impacting success or failure of an investment. A lot depends on other factors like fund selected, type of fund (diversified, sectoral etc.)

• At times lump sum investment can be better than SIP. For example in a rising market, lump sum investment at the beginning of uptrend will give better return than SIP.

• SIP cannot always contain loss. For example, in a falling market, investment will incur loss inspite of SIP.

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