MF Investments – SIP Vs Regular lump sum

POSTED BY Ashish Garg ON March 14, 2013 4:41 pm COMMENTS (26)

Hi,

I have been investing in Equity Mutual Funds via SIP route as suggested by lot of people and recommended in this forum as well. My SIP is Rs.5,000 a month which is fixed for 10th / 11th day of every month. I have been paying the SIPs for nearly 2 years now and woudl continue to do so.

One of my friend who is very active in investments, has been investing almost the same amount but not via SIP, he keeps on buying units the day he feels market is slightly down. This way sometime he invest 3000 (1000 x 3 times in a month) a month and sometimes 8-10000 (8 or 10 x 1000 in a month) a month. This way he has invetsed almost the same amount but has slightly better returns than those of mine (say a difference of about 2-2.5%).

Of course he has to keep a track of market on daily basis and I dont have to put my time and mind in this.

But then I would like to know, is his apprach better than the SIPs as practically he is getting better returs than the theoratically correct SIP approach?

Regards,

 

Ashish

26 replies on this article “MF Investments – SIP Vs Regular lump sum”

  1. Dear TheZionView, thanks for the sharing & points noted.

    Thanks

    Ashal

  2. Fully agree with Ramesh’s view on VIP. I think it has to be tested across many market cycles. There will definitively be periods where VIP underperforms SIP. To FundsIndia’s credit they do mention this in their webpage.

    There are retirement calculators available (Firecalc, one by Jim Otar) which backtest with US market data. They clearly mention that the method is not valid unless we have data for several (at least 10) market cycles (each cycle is like 10-15 years). I foolishly spent a lot of time making one for the Indian scenario until I realized that the sensex is too young!

    Reg. VTP which is VIP using a debt fund as the source instead of a bank acc. One should ensure to choose a liquid fund and that too with daily (or perhaps weekly) dividend (or dividend reinvestment) option. This is the only way to ensure zero STCG. Even then it is a hassle as zero STCG is not a certainty!

  3. Dear TheZionView, welcome back. I do hope everything is fine on your side. It’s a foul from your side that only a simple comment, Quote – “Interesting Read”. We need your inputs too dear. Please participate. We were missing you a lot.

    Thanks

    Ashal

    1. TheZionView says:

      Thanks Ashal for welcome. Will try to keep up with this new pace..

      I am a firm believer in KISS strategy hence VIP doesn’t interest me. Though VIP is not direct market timing its still trying to time the market in its own way.

      A value based investing works best when you are doing direct stock investing. But with respect to SIP it will make a very small/NO difference hence doesnt interest me. We can do all the back study as much as we can but it will still be less relevant for the future.

      Like the saying in Long Term Lumpsum is better than SIP but one has the define what is that long term mean to them

  4. TheZionView says:

    Interesting read πŸ™‚

  5. Dear Ashish, please don’t jump to the conclusion that every 2nd person is doing similar to your friend. Actually all of us are doing something either by choice or be copying some one else. When I shared you the Idea of VIP, that was there to give a thinking point not to follow in totality.

    At the end of the day, it does not matter much if I’m standing @ 1Cr. & you are at 1.2Cr. If my goal was 75L & I’m getting 1Cr. I have done my hard work & reaping the reward. In your case, if it was 90L & you get 1.1Cr. you are also good. the problem starts if your goal was 1.5Cr. & you are standing @ 1.1Cr.

    So do not put too much pressure on yourself regarding to opt the ‘PERFECT’ thing.

    Thanks

    Ashal

  6. Dear Ashish, some eat veggies & some live only non-veggies & there are some who are falling in between. No one is perfectly right or rightly perfect. πŸ™‚

    We have to define our own comfort level. Regarding your performance comparison with your friend’s portfolio, please do not go for it. Please compare with your index say Sensex or Nifty or the index where your fund is comparing itself as benchmark.

    Thanks

    Ashal

    1. Ashish says:

      Dear Ashal,

      That’s a good one. And here I am trying to become eggies, some part veg and some part non-veg.

      This question seems to be getting interesting with every post and trust me I am not actually comparing the profits but trying to compare the strategies here. I can see that lot of us have the similar strategy as of my friend and lot others have the SIP route.

  7. Atul says:

    Hi Ashish,

    I am doing exactly what your friend has been doing. Myself and my wife both have account with FundsIndia and we do regular SIP as well as additional SIP when market goes down by at least 100 points. The returns have met our expectations so far.

    As Prof. Pattu says one needs to track the market and ensure discipline.

    Cheers

    Atul

    1. Ashish says:

      Dear Atul,

      Thanks for your response. I think soon I am going to add myself to the same list of lump sum investing in MF at regular intervals by tracking markets more often.

      Regards,

  8. Manish tagged me on facebook to look at this interesting discussion.

    The problem with commenting on this is that it is not possible to empirically establish the superiority of one method vs the other. One method is fixed, non-emotional and non-human dependent, while the other differs on all three counts.

    My personal suggestion, and based on my interactions with hundreds of regular investors the prudent thing for regular folks, is to start with SIP portfolios, and graduate to VIP/VTP models over a period of time as one gets comfortable with market movements.

    Of course, with FundsIndia, since one can do additional investment at the click of a button in any of their schemes, it would be trivial to execute the choose-and-invest method as well.

    thanks,

    Srikanth

    1. Ashish says:

      Dear All,

      I thank you all for your valuable inputs, which has made me a little more educated on the MF investment front and I hope that this forum will continue to help people like me in educating them to be more investment savvy.

      Regards,

  9. Sumit says:

    Yes, your way is not very different than SIP. I also like to start this as an experiment, my SIP dates are on 5- 7th, rather than that we can keep the buying window 1-10th, and will also consider Ashal’s VIP (to check the value is less than target return) to invest in current month.

  10. Dear Ashish, a more practical & disciplined approach ‘ll be to use VIP. Value Investment Plan. Start with a minimum mly amount. Fix a target return for your portfolio Say 12% yly or 15% yly. Now after 1 month, check the value of your portfolio. if the value is less than your target return, make up the loss with fresh investment else do minimum investment.

    I’m using the same for my inverstment in Quantum long Term Eq. fund. to make it automated one, I’m doing so using fundsindia platform. As the expense ratio of Quantum LTE is same for direct investing or fundsindia, I’m not losing anything extra on account of trail commission. Interestingly I’m doing VTP (cousin of STP). Value Trasnfer Plan. Lump sum money is invested into Quantum liquid fund & from there my money is invested on my set dates automaticaly as per my choice of amount & target return.

    if you do want to use it for your own good, you may do so. Please do remember, in case of other AMcs like HDFC or DSP or Franklin or IPru, direct investing ‘ll be a better option using VIP.

    thanks

    Ashal

    1. Ashish says:

      Dear Ashal,

      Thanks for your inputs. I shall continue with my SIPs as of now and try to park the extra monies, if any, in the MF on the days market takes a dip. This way I think I will be a little bit more planned as SIP will continue to earn the way it should be and extra buys shall give me booster power as and when it happens.

      Thanks FFC and Ramesh for your view points.

      Regards,

  11. Yes his approach is superior since he enters the market on more favourable days which is not possible with a SIP. If you can do this go ahead. only thing is it requires a lot of disciple. I too follow a similar approach but I do it once a month like a SIP. I just try to do it on a day the market dips. I don’t wait forever to do this. I keep a cutoff like the first week of the month. if the market rises continuously that week I will still buy else I will forget!

    However a SIP represents the simplest form of “KISS”. Your friends approach is good but not for everybody.

    1. Ashish says:

      Dear FFC,

      Thanks for your straight forward response.

      As you said, one need lot of discipline while going for regular lump-sum investments which would not be difficult in todays’ time when you can buy / sell online. Only thing required here is to make sure that in the hope of market to come down one should not end up breaking the investment chain.

      In such scenario, I think your approach is better to fix a time limit to buy. I should try and follow this approach and see if I can place myself a little better from my current position.

      Thanks again.

      1. Ramesh says:

        If you have a fixed amount and a fixed date, SIP is better because it is disciplined and you have put money asap.

        Regular lump sum is better if you have variable amounts and/or variable funds.

        The difference of 2-2.5% is a statistical aberration over this time frame. Stop looking at others, concentrate on your own goals.
        Don’t change methods just because…

    2. Sumit says:

      Hi FFC,

      This looks influencing, but as you said one should be much more disciplined – should not be too tempted and carried away by emotions. Just interested to know (obviously if you don’t mind) for which fund you are doing so? — I think mid-small cap is better candidate than large cap here, due to more fluctuations. I also like to try that.

      1. In reality the way I do it, its not very different from a SIP as I give myself only a short window. The truth is I started doing it for a different reason: my entire salary was getting locked into SIPs+ expenses. I didn’t even have an extra Rs. 100! So I wanted some breathing space and stopped my SIPs and started doing it as mentioned above. I do have enough emergency fund but I found too many SIPs stifling. Then slowly I started buying on market lows.

        I haven’t bothered to check if this is better. either way I don’t care. So I haven’t applied more thought on which fund to use this for. I (think!) I use it for all types.

        I think a simple SIP is good enough.

    3. 3sharad says:

      Dear Ashish,

      My few cents:

      1. Buying cheap and selling high is a holy grail. It is the right way, “if you can get it”.

      2. Note the “if you can get it” in 1. Timing the market is extremely difficult.
      If you observe, many times you would see the market being uni-directionally down till say 2 PM and then closing in the green and vici-versa (2 PM is a random time I have taken for emphasizing the point). With that in mind, you might click the invest button to get that day’s NAV assuming it would be in the red and cheap, but end up buying at higher NAV.

      3. Also decide which end of the spectrum you want to operate on. On the one end, you are operating with say 10th as the date for investment in MFs irrespective of market state. Then there is your friend who varies the date as per the markets. Further you have VIP/hybrid VIP where you can vary the time and investment amount. At the extreme end, you have traders who pick stocks intra-day for buying and selling.
      As you travel from your end to the other end, the time you need to invest for your investments starts increasing and as you try to become a trader, you must be a full time into trading job.

      Combine the above three and you have the answer. If you are not in the business related to markets, Keep It Simple. Its not easy to track the markets daily with a full time job. However, you can still try VIP which doesn’t require daily tracking.

      Best Regards,
      Sharad

      http://www.thefundoo.com

      1. Ashish says:

        Dear Sharad,

        Thanks for sharing your views. For me the best choice is to keep it simple through SIP but then as I said, lump-sum buys in between shall work as a booster as and when purchases are done.

        In a short term it possible wont make much of a difference but in long term, a 2 – 2.5% per year can make a positive effect.

        All I understood from various responses here is, I need to make investments regularly either through SIP (the better way) or through lump-sum (not so better way but still fine if done religiously) and not keep on waiting for market to be down everyday and then buy.

        Regards,

        1. Ramesh says:

          Think in this way.
          You got cash from your salary, and you want to put that cash into equity (because you have done all other things already, eg insurances and short-term requirements which HAVE to be kept in debt forms).
          1. If the amount of cash is FIXED, and the date is FIXED, Then, you Should transfer from cash to equity ‘as soon as possible’. The simplest, best and fastest way is SIP. period.
          2. Now if the amount of cash and date are fixed, single lumpsum (or multiple lumpsums on different days) on checking out the markets daily (hourly, whatever) is an underperforming strategy. (FFC’s method is different because he wants to have more granular control over the amount).
          3. VIP is trying to partially time the market. It bets that in the short term, the markets will fall, but in the longer term they will rise more. Sorry, that is a strategy which is using diametrically opposite things. And in the study to which I have linked above, actually Momentum Investing Plans (invest more when the markets are rising) provides more returns in comparison to Value-Investing Plans (this is not the original value investing). In Momentum Investing Plans, you are betting that markets will rise more in both short-term and long term.
          4. If you have EXTRA money lying with you, then of course you can invest as lumpsum additionally.

          Hope this clears things for you more. For you, SIP is better than any other system.
          Ramesh

      2. Ramesh says:

        Sharad,

        Please check check out this paper regarding SIP vs VIP (and Momentum SIP too, though there is no option of that available to us).
        http://www.gersteinfisher.com/research/research_articles/research-papers-dcas-benefits-and-drawbacks-examined1

        Mathematically speaking, VIP is a losing strategy, in most cases, than simple SIP. Why does one want to complicate things as well as underperform, just so as to do things differently? No wonder, simple is so tough.

        Ramesh

        1. 3sharad says:

          Hi Ramesh,

          Went through the paper, its assumptions and methodology. Seems something wrong with VIP implementation there.

          The paper uses a fixed variation, implying that it doesn’t differentiate between months where the market falls by 1% or 10%.

          An implementation of VIP is provided at http://www.fundsindia.com/documents/VIP-FundsIndia.pdf in the Indian context.

          It shows the results and out-performance of VIP on prominent MF schemes across various time periods. There would be market states where VIP might underperform depending on the underlying fund/index and market states.

          Another study here: http://www.valueaveraging.ca/docs/Study_How_Value_Averaging_adds_Value.pdf

          The paper you suggested, also says that Lump-Sum is better than SIP (referred as DCA over there), It’s true that SIP would under-perform Lump-sum in uni-directional +ve markets.
          The arguments for Indian markets are here: http://www.fundsindia.com/blog/index.php/mutual-funds/are-you-better-off-investing-lump-sums/782/

          If Simple is the best, its great… else we must simplify the complexity
          (like we do SIP rather than the simplest lump-sum)… πŸ™‚

          Regards,
          Sharad

          1. Ramesh says:

            Thanks for looking into those parameters.

            It seems that the value-averaging method is different between the two.

            However, the Fundsindia VIP method has some issues, namely:
            1. The duration is ‘just’ 3 years. The statistical error become quite big for shorter durations. The start and stop becomes extremely critical. When we have much longer data, then we can use that too.
            2. Use of active managed funds will create more issues, and will interfere with the actual results. In totality, then the result will include both the underlying fund’s management as well as the technique. Yes, they have used one index fund too. But still. More data should be able to decrease the statistical errors.
            3. Though, you have rightly mentioned that there are periods in which VIP will lag SIP, but that observation is not mentioned anywhere in the final comments / conclusions in the study.
            4. In my view, before applying a new technique, it should be rigorously back-tested, followed by actual testing in real-world (at least on paper), and then application. But, yes, complexity sells well! πŸ˜‰

            Your second study is just too narrow. Single periods have been used with different funds, which just increases the statistical errors. Who is to say, that the results were not back-fitted into the conclusion. If you will look, across every period of time VIP worked better than SIP, which is just not possible.

            Compare to the link I mentioned, in that if you will check (leave aside the type of value-averaging done), VIP outperformed SIP in 45% of total 20 year returns (and likewise underperformed in the rest 55%) out of the theoretical 50-50% of a flip of coin. While MIP outperformed SIP in 54%. The differences are very small, as they should be. A 5% here or there. I hope I am making myself clear.

            Regarding your last statement, SIP is just a lumpsum investment only. You invest as soon as you have money, without timing.

            Try a total corpus put into equity by way of Lumpsum (all put in one go) versus STP (put into debt/cash and then shifted into equity progressively over time). In that case, lumpsum will come out to be better in more cases than the latter, because of the “simple” logic that investments into equity gives you more return than in debt/cash.

            Equity returns should be done across long periods to make any sense. Not 3-year data. This is what I think.

            But, still thanks again for looking into the data.
            Ramesh

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