Systematic or lump-sum investment?

Rule: Systematic investment plans (SIPs) average out the costs and earn higher returns.

Exception: In a rising market or when the indices are at multi-year low levels, lump-sum investments tend to earn far better returns than the SIPs.

166 per cent higher was the value of a lump-sum investment in the Franklin Bluechip Fund compared with the five-year SIP between Nov 2002 and Oct 2007.

Rs 22,500 invested as a lump sum in the fund in November 2002 would have grown to the same value as a five-year SIP of Rs 1,000 per month.

The Sensex rose from 3,058 in November 2002 to touch 18,500 in October 2007. During these five years, it witnessed ups and downs, but the undercurrent remained decidedly bullish. So, while SIPs gave decent returns during the bull run, lump-sum investments at the start of this period grew manifold.

Here’s the difference in returns from a SIP and a lump-sum investment in the Franklin Bluechip Fund from November 2002 to October 2007:

SIP (of Rs 1,000 a month in the fund starting Nov 2002 and ending in Oct 2007.)

Investment: Rs 60,000

Grows to: Rs 1,90,152

CAGR: 25.95%

Lump sum

Investment: Rs 60,000

Grows to: Rs 5,06,025

CAGR: 53.18%

SIPs have become a popular mode of investment in stock markets for millions of Indians not only because they help beat volatility but also because they are convenient—in most cases, the investor is not in a position to make a lump-sum investment—and force the investor into a habit of regular savings.