Investment Strategy : SIP Vs Lump Sum


The Vanguard Group, the largest mutual fund company in the US and pioneer of index funds, has just come up with a startling piece of research debunking the myth that systematic investment planning (SIP) is a better strategy than a lump-sum investment (LSI), regardless of the asset allocation strategy used. It analysed 10-year rolling returns of SIP and LSI in the US, UK and Australian markets for the periods between 1926 and 2011. It found that LSI outperformed SIP two-thirds of the time, when SIP was used monthly only for the first year. Findings were similar for UK and Australia as well. However, although this research is interesting, it has limited value.
Firstly, Vanguard had taken SIP only for a limited timeframe of six to 36 months rather than for the entire 10 years. In order to make meaningful comparisons, Vanguard should have taken SIP for the entire 10-year period. Secondly, the differences between SIP and LSI will depend on how the market turns out in the future. Yes, SIP does not always work, despite what pushy mutual funds say, but works stupendously if one is able to use some market-timing method—however rudimentary. The Vanguard study states that SIP would be ideal if one is uncomfortable with markets over the short term. But then forecasting short-term market movements is more dependent on luck than skill, for the average investor. Thirdly, while instituting the SIP method, the unused portion of LSI is not supposed to be left idle as cash. This is why, while comparing the returns of LSI Vs SIP, one must assume that part of the LSI not invested via SIP is earning steady returns from liquid funds. 
The argument Vanguard offers in favour of LSI is that market has always gone up and, therefore, it is better to buy when the prices are low than ‘average up’. While this is true over a very long period, it certainly is not true for many investing lifetimes. After all, the S&P500 is today—13 years later —exactly where it was in late-1999. We had already written extensively about when and how to use SIPs in Moneylife (issue dated 28 June 2012).




4 years ago

It can never be an either / or kind of a situation.

There are times when it is better to be investing in SIPs and there are other times when it is far more profitable to undertake lump sum investments.

However, SIPs are for those who find it difficult to invest lump sum. The biggest advantage of SIPs is, they are a mechanism to commit people to invest when the markets are down (and in their favour) - but we have seen in 2008 and 2011-12 that people either suspend their ongoing SIPs or worst they redeem it altogether.

It is far more important to invest and stay invested rather than worry and debate about which is better and end up doing nothing and staying out of the market - as is the case now with millions of mutual funds investors in India.
A recent study has found that only 7.2% of the Indian urban households own mutual funds.

Mutual funds are an excellent vehicle for accumulating wealth over the long term - but, there can never be any method, which can 'guarantee' better returns than other methods across all market conditions.

A mutual funds investor must be happy if he gets a few percentage points more than 10 yr g-sec or say at best 12% - 15% CAGR on his investments.

The problem is people are never satisfied with what they have.. .

United Bank to raise Rs300 crore through rights issue

United Bank of India plans to raise at least Rs250 crore but not exceeding Rs300 crore, including premium from rights issue

New Delhi: United Bank of India has said its board has given approval to raise up to Rs 300 crore through a rights issue, reports PTI.


The Board meeting has approved to create, issue and allot up to such numbers of shares of Rs10 each at a premium to be decided subsequently on rights basis to the existing shareholders of the bank as on the record date to be fixed subsequently, United Bank of India said in a filing on the BSE.


The state-owned bank proposes to raise at least Rs250 crore but not exceeding Rs300 crore, including premium from rights issue, it said.


Government of India holds 81.56% stake in the Kolkata-based bank. This means that if it decides to raise fund through rights issue then the Government of India being the largest shareholder has to subscribe shares to the extent of its holding in the bank.


Prior board approval has been secured to enable capital infusion by the government in the bank.


Besides, the board of the bank also given approval to raise up to Rs500 crore by allotting perpetual bonds through private placement.


It also approved issue and allotment of perpetual bonds in the nature of promissory notes of Rs10 lakh each for cash at par up to a maximum amount of Rs250 crore with a green shoe option up to a maximum of Rs250 crore through private placement, the filing added.


Earlier, Financial Services Secretary DK Mittal had said the government will finalise Rs15,000-crore capital infusion for public sector banks soon to help them enhance capital base and increase lending capacity.


Rights issue is under consideration for recapitalisation of banks, he had said, adding that if the government opts for rights issue for banks, it will be done for all banks.


White paper on irrigation scam in Maharashtra within three weeks, HC told

The state government informed the HC that a white paper on the alleged multi-crore irrigation scam would be ready within next three weeks

Mumbai: Maharashtra government on Thursday informed the Bombay High Court that a white paper on the alleged multi-crore irrigation scam, involving bureaucrats of Water Resources Department and Konkan Irrigation Development Corporation (KIDC), would be ready within three weeks, reports PTI.


This statement was made by Advocate General Darius Khambata before a division bench of Justices AM Khanwilkar and Mridula Bhatkar which was hearing a public interest litigation filed by social activist Pravin Wategaonkar seeking an inquiry by the Central Bureau of Investigation (RBI) into the scam.


"A White paper will be ready in this case within three weeks. Based on this we will file an affidavit before the court in reply to the allegations levelled in the petition," Khambata said.


The bench directed the government to file its affidavit by 20th December.


Wategaonkar in his petition has alleged criminal conspiracy and misconduct on the part of public servants and sought CBI probe in all projects where cost escalations of Rs20,000 crore were approved across three months in 2009 by the Water Resources Department (WRD).


"It is not mismanagement or ignorance of the WRD but deliberate and well managed act of massive corruption by WRD and KIDC and contractors paid to carry out works associated with these projects," the petition claims.


Relying on a speech made by Chief Minister Prithviraj Chavan in May this year, Wategaonkar has said, "In the decade beginning with year 2000-01 till 2009-10, the government of Maharashtra has spent about Rs70,000 crores on irrigation projects. In the next decade the projected cost is Rs75,000 crores. Probe should be conducted to rein in the unwarranted cost escalations and arbitrariness."


The activist further said many acts of omission and commission by the government departments against public interest would amount to criminal misconduct and abuse of power by public servants and thus an offence under the Prevention of Corruption Act.


According to the petition, even after incurring an expenditure of Rs4,363 crore up to 2009-10 on 90 projects of KIDC, only 13 projects could be completed.


"Due to slow progress of the projects the very objective of forming KIDC which is for expediting the entire process of completing ongoing projects has failed. The projects which otherwise would have been completed by the irrigation department in ten years, could not be completed by KIDC even after 12 years of its formation," the PIL states.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)