Lump Sum or Market Linked SIP

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The Question

Most of our members agree with our view that they should have at least 60% of their mutual fund assets in equity and they want to know how to get to 60% + .

As the Indian stock market keeps climbing our members ask " I have a large amount that I want to invest in equity mutual funds. Should I do market linked systematic investing or invest it in a lump sum? "

The Answer

Making the correct decision can make a significant difference to your wealth. As a Robo Advisor Bharosa Club likes to give advice based on data and then leave it up to individual members to decide what works best for them. You can jump straight to the conclusions or read through the analysis. The final section explains why we think that right now in 2018 market linked and not lump sum is better even though in 2017 till now a market linked investor is losing 16%.We analyzed data from Jan 1, 2000 to Jan 1, 2018 where we compared two scenarios

Lump sum – Invest 60% in equity and 40% in debt on first day of the year

Market Linked – Invest based on market PE as per table below on the first of every month till you reach 60% equity.

The market values of the portfolio were compared in the month the market linked approach crossed 60%. Years were classified as Attractive, Fair , High and Risky based on the PE on the first day of the year as indicated in the table below.

The results of Lump sum versus Market linked are given in the table below

General Conclusions

Myth : SIP ( Systematic Investing) is always better than Lump sum

Of the 18 years studied in 10 Lump sum investing was better. On closer analysis however it is clear that when the market PE is below 18 Lump sum investing is clearly better than systematic investing. Five of the 18 years fall in to the category where PE was below 18. Of the 13 left systematic investing was better in 8 out of 13 and where it was worse the difference was not much except in 2014 and 2017. In all cases where lump sum has been better the markets have gone up so by using systematic investing the investor may gain but even if they lose it is only that the upside is reduced.

The bottom line advice is “Use systematic investing whenever market PE in India is greater than 18”

What to do in 2018

Investors who followed market linked systematic investing in 2017 have had 16% lower gains. Had they invested Lump sum they would have gained 28.76% as against 12.78% with market linked. Why then are we recommending market linked for 2018?

Sustained high PE is very dangerous and there have been sharp falls after periods of high PE. The chance of a sharp fall in 2018 is significant. In the event of a sharp fall of say 10% in equity markets it is better to earn say 6% in debt than -10% in equity. If a fall does not occur then the loss of gain can be considered as an insurance premium and that thinking should work for most Indians as they tend to be risk averse. Systematic investing also has the psychological benefit of taking a measured approach. 

2014 onwards – Has something changed – Greed versus Fear? 

2014 and 2017 are the two years where in a high PE situation Lump sum has worked better than systematic investing. Has Modi introduced a feel-good factor where hype transcends reality? Low interest rates and 15 million new investors in mutual funds could all being contributing to a “goldilocks” market. In most cases there is a correction so if you can stomach missing out on outsize gains and are satisfied with reasonable gains then systematic market linked is for you. Warren Buffet sits patiently on cash waiting to invest when there is blood on the streets. Should you wait for a market correction? According to us the answer is to continue investing 2.5% to 7.5% of your portfolio every month to reach your target asset allocation and then to rebalance quarterly after that.