SIP or lump sum investment – which is the best way to invest in mutual funds? Both methods offer the opportunity to grow investments over the long term, but their nature and benefits are different. A lump sum involves investing a large sum at one time, while a SIP involves investing a fixed amount every month or quarter. In this write-up, we will pick some top-performing equity funds from different categories and see which strategy has worked better over the past 10 years.
For this analysis, we selected three sub-categories within the equity space (Largecap, Flexicap, and ELSS). Within these categories, we only considered mutual funds that are at least 10 years old and have a 5-star rating (Direct Plan).
Large-cap funds
DSP Large Cap Fund – It has delivered a 12.95% CAGR in lump sum investment over 10 years, but SIPs performed slightly better with 14.71% CAGR.
HDFC Large Cap Fund – The large-cap fund has delivered a 14.20% CAGR in lump sum investment, while SIPs yielded 15.48% CAGR.
ICICI Pru Large Cap Fund – It has delivered a 15.57% CAGR in lump sum investment, while SIPs have given 17.01% CAGR.
Note: This clearly demonstrates that the SIP strategy yielded greater returns than lump-sum investing for large-cap funds over a 10-year timeframe.
Flexi-cap funds
Investing in the flexi-cap category is more profitable because the fund manager has the freedom to invest in large, mid-sized, and small-cap companies.
Only two funds in this category met our criteria.
Parag Parikh Flexi Cap Fund – The flexi-cap scheme has delivered a CAGR of 19.15% CAGR over the past 10 years in lump sum investment, but with SIPs, this increased to 20.77%.
HDFC Flexi Cap Fund – It has delivered a CAGR of 17.27% CAGR in lump sum investment, while SIPs delivered 19.96% CAGR.
Note: Here too, SIPs delivered stronger returns than lump sum investments.
ELSS funds
ELSS, or tax-saving funds, have a lock-in period of 3 years, and investors receive tax benefits under Section 80C.
HDFC ELSS Tax Saver Fund – The fund’s lump sum investment has delivered a CAGR of 15.13% over 10 years, but with SIPs, it delivered 17.84% CAGR.
SBI ELSS Tax Saver Fund – The ELSS scheme has delivered a CAGR of 15.51%, while with SIPs, it increased to 18.87%.
Note: Along with the tax benefits, SIPs delivered better returns here as well.
Lump sum Vs SIPs: Which investment method is right for you?
Lump sum investing is ideal for investors who have a large sum of money available at one time and can invest it in the market for a long period of time. This method is especially beneficial when the market is declining and investors can invest a lump sum at that time.
SIP investing is more suitable for small retail investors because it involves investing small amounts regularly. This method provides the benefits of rupee cost averaging and balances market volatility over the long term.
Don’t invest solely based on returns
Investors often choose funds based on returns, but this is not the right approach. When choosing a fund, consider not only returns but also the following factors: The fund manager’s experience and track record, fund’s expense ratio, fund’s risk meter, diversification of the portfolio and fund house’s credibility.
Summing up…
This analysis clearly shows that over the past 10 years, SIPs have delivered better average returns than lump-sum investments, whether large-cap, flexi-cap, or ELSS.
However, the method chosen should be based on the investor’s profile, goals, and risk tolerance. It should also be noted that this analysis is limited to these three categories. Results may differ in other categories or sub-categories.