Equity investment: Lump sum or via SIPs?

7 MinsOct 21, 2021

Since the start of this calendar year, the S&P BSE Sensex has rallied over 12,000 points, posting an absolute return of around ~26% on a year-to-date basis (as of October 11, 2021). And since the March 2020 lows, the gains are even more remarkable at ~131% on an absolute basis. Investors, who held their equity investments amid the COVID-19 pandemic, have been rewarded handsomely. Going forward as well, anticipating positive undercurrents, many market participants expect the rally to continue. 

lump sum investment

At this point, you may be wondering whether to invest a lump sum in equity mutual funds or take the Systematic Investment Plan route. Whatever you decide, remember that holding back from making fresh investments or waiting for a correction may not be a wise move. You may miss out on the opportunity to generate wealth. Instead, it is advisable to stagger your investments. In other words, if you have a lump sum amount, invest in a piecemeal manner in phases. Do not deploy the entire investible surplus or a windfall income at one go. 

Say you earn a Diwali bonus of Rs 5 lakh this year and want to invest for your financial goals. You could invest around 20% (Rs 1 lakh) at this juncture in top-rated equity or hybrid mutual fund scheme and the remainder in phases at later dates. This will give you time to understand where the market is heading. 

Factors to watch out for:

  • Valuations look a bit stretched across market capitalisation segments.
  • The risk of the third wave of COVID-19 and its impact on the market cannot be ruled out.
  • When liquidity begins to dry up and the interest rate cycle changes, the market is bound to witness volatility and correction.  
  • Corporate earnings have improved over the last few quarters, but it is mainly due to a favourable base effect and cost reduction. For the equity market rally to continue, earnings growth should be sustained by consumer confidence and strong demand, and not just by cutting costs. 
  • Do not get swayed by unrealistic corporate earnings estimates and be under the impression that they would improve in a linear manner quarter-on-quarter.

Hence, it would be wise to keep realistic post-tax return expectations from your equity investments.

SIP-ping into mutual funds is a better strategy now

SIPs will help you mitigate risk better and negotiate market volatility. If the market turns volatile or corrects from the present level, the inherent rupee-cost averaging feature of SIPs would take care of the intermittent volatility. You will automatically buy more MF units when the market is in a correction phase. This will, in turn, help compound wealth when the market begins to ascend again. 

SIPs usually work best in correction or bear phases
lump sum investment
NAV based on Nifty 500 – TRI between March 01, 2015, and February 29, 2016 Lump-sum investment assumed Rs 60,000
(Source: ACE MF, PersonalFN Research)

The graph above depicts how in the corrective phase of the Indian equity markets from March 2015 to February 2016, more SIP investments were bought more compared to a lump sum investment.

If the market continues to rally, SIP may disappoint
lump sum investment
NAV based on Nifty 500 – TRI between March 01, 2020, and October 11, 2021
Lump-sum investment assumed Rs 1 lakh
(Source: ACE MF, PersonalFN Research)

Conversely, if the market continues to scale new high, the subsequent investment made in SIPs will be at a higher NAV, which will increase your purchase cost, but you would buy a lesser number of units. In such a case a lump sum investment may do better.

That said, identifying market bottoms or market peaks, is not an easy task. No one, not even the seasoned investors and/or market experts, can forecast it with all certainty.

It is the following benefits depicted by the infographic that should encourage you to approach SIPs as a potentially rewarding strategy to invest:

lump sum investment

Use Axis Bank’s SIP Calculator to know the amount of SIP you would need for achieving a financial goal.

If you are already meaningfully SIP-ping into the top-rated equity or hybrid mutual funds, do not stop or discontinue your investments. It could put brakes on the compounding process.

[Also Read: Match Your SIPs To Your Financial Goals]


SIP V/s a Lump sum investment over the long-term
lump sum investment
Data as of October 11, 2021
Returns based on investment in Nifty 500 – TRI
(Source: ACE MF, PersonalFN Research)

The graph above is a vindication of SIP proving to be an effective route to generate wealth over the long-term. Hence, make your pay-day your SIP day. Invest first and spend the remaining amount. Such an approach will help your financial well-being in the long run. 

Today, many fund houses allow choosing a specific SIP instalment date besides the usual practice of selecting default dates, i.e. 7th, 10th, 15th, or 20th of every month on the application form for monthly SIP instalments. 

Furthermore, when you receive annual increments, make it a point to step up your SIP investments. There are two ways you can step up SIPs:

1) By a fixed amount each year. So, say you have a monthly SIP of Rs 10,000, you can increase this amount every year by Rs 1,000 or Rs 2,000 as per your requirement; or
2) By a fixed percentage each year, say by adding 10%-20%, to your current monthly SIP year-after-year. 

Stepping up your SIP instalments ensures that your marginal propensity to save and invest increases every year with a rise in income. Plus, it adds to the power of compounding, helps counter inflation better, and makes it possible to realise the envisioned financial goals sooner. Hence, While Investing, Check If Your Mutual Fund Offers The Facility To Stelp-Up SIPs.

Align your SIP investments with your financial goals, make sure you invest the right amount and choose the schemes to match your risk profile, investment objective, financial goals, and the time in hand to achieve those goals. 

Click here to select an equity/hybrid mutual fund best suited for your needs.

Remember, the investment strategy you follow, timely review of your portfolio, and the necessary financial discipline decides your investment success. 

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.