The Hindu Business Line : Fund Talk

If one compares returns through the SIP route with lumpsum investments for certain periods, one finds that lumpsum investments have done better than SIP investments at times. Why is this so? In SIPs, is it not necessary to take into consideration the entry loads and exit loads charged by most fund houses, which is steep?

Amit Rao

Mumbai

You have rightly observed that there have been periods when lumpsum investments in mutual funds have fetched higher returns than investing through a systematic investment plan. Before we proceed to discuss such differences, we would like to reiterate the purpose of a SIP. The objective of an SIP is to optimise your returns and not necessarily maximise returns. Having said this, the SIP vehicle has, in many cases, delivered superior returns to lumpsum investing over long periods (of at least five years) due to rupee cost averaging.

In other words, it averages the cost of your fund by buying units through various market highs and lows. Further, apart from inculcating disciplined investing, it does away with the need to track the market constantly and time your investments. Coming to your question on the difference in returns between lumpsum and SIP investments, higher returns in lumpsum investment accrue if you have been able to time the market accurately (by skill or sheer chance!).

For instance, had you timed your investment during the market low of, say, June 2006, you would definitely be sitting on capital appreciation of close to 30 per cent on a fund such as Franklin India Flexi Cap, against about 12 per cent through SIPs (from early June 2006 to May 2007). This is merely a case of timing as, after June 2006, the market was rising and you actually managed to invest during a short period of lows. The same picture may change over a three or five year period.

In other words, in a short period, if the markets were in buoyant phase, then every additional unit of SIP would have been purchased at a higher NAV, thus muting your returns.

Similarly, if you invested at a peak and the market turns to prolonged weakness, an SIP over a short period would have suffered from the same disadvantages of lumpsum investing as one does not allow enough time to average the cost. While higher SIP returns over a five-year period can occur as a result of rupee-cost averaging, in the shorter run, higher SIP returns often indicate volatility of the fund on the downside.

An SIP is a very useful tool when you are investing in aggressive or volatile funds whose NAV witness steep variations from month to month. In such funds the SIP return may beat lumpsum by a huge margin. Similarly, during volatile phases of the market, like the past year, the SIPs of a number of funds have returned much higher than investing at one go. Even in funds such as HDFC Top 200, which contain volatility well, the SIP return beat lumpsum by a substantial margin in the above period.

If you really want to have the best of both worlds, you can actually invest a lumpsum in the same fund in which you are running an SIP, if you are absolutely sure that you are timing your entry well. This may help perk up your returns. By doing this, you are not only adopting rupee cost averaging (through SIP) but also value cost averaging i.e investing more money when the NAV reduces. However, this calls for active tracking, unlike an SIP.

Entry and exit loads: It is true that a number of funds that charged nil entry load on SIPs initially have graduated to charging the same. Now almost all funds which are open-ended charge entry loads for SIPs and lumpsum investments but have done away with exit loads.

While calculating returns, the entry load is automatically taken into consideration (in SIP and lumpsum) because the number of units allotted is after adjusting the NAV for the load. Yes, one needs to be aware of the load being charged but as long as you select a fund with a good track record, the load factor should not play a primary role in your investment decision.

As for exit load, you may be talking about the load charged for discontinuing an SIP within the period initially opted by you. For instance, if you have an SIP for one year but choose to discontinue it in, say two or three months, you are charged an exit load. This is because the company incurs transactions costs in processing your SIP as you initially commit to invest for a certain period. Given that the very purpose of SIPs is to optimise returns through disciplined investing over a long period, you should avoid exiting SIPs in between, except in an emergency. You can, instead, take short SIP terms of, say, six months and renew after evaluating performance. This will prevent incurring loads by exiting midway.

Vidya Bala

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