An SIP or one-time investment?

If I continuously invest Rs 5,000 per month in an equity fund, is it possible to build a corpus over 15 years? Would I not make much more by investing it all at one go and holding on for that long? Would I need to change funds to keep the growth going?
— Ashwin Arora

Regarding the possibility of building a corpus over 15 years, it certainly is plausible. Even if you invest just Rs 5,000/month and earn an annual return of 12 per cent, you would end up with Rs 25.20 lakh at the end of 15 years.

Alright, that's theoretical. So let's look at some actual funds to see if this thesis holds up. I have taken a 15-year time frame and looked at a Systematic Investment Plan (SIP) of Rs 5,000/month over this entire period. The diverse line up includes some superstars as well as dogs. That's deliberate. It will convey a more realistic picture. As you can see, there is no arguing with the numbers. And even though the worst performing fund made money, the difference between the best and the worst is nothing short of glaring.

Your second question is interesting, and you may even be right, but look at the table below for a reality check. If you are looking at a one-time investment, you would first of all need to be in possession of capital, in this case Rs 9 lakh, that too 15 years ago. Once you overcome this hurdle, you would end up being a hostage to market timing. What if you had invested the money at the peak of the market cycle, say January 2008 when the Sensex was at around 21,000. Can you imagine the worth of your investment by December 2008 when the Sensex dipped to an abysmally low 8,500? Psychologically, the impact of seeing your investment reduce to half can be disastrous. The good thing about a systematic investment plan (SIP) is that it helps you ride the market upheavals to your advantage. And it does what you want, which is accumulate wealth over the years in a low-cost, transparent fashion without a strain on your finances.

Schemes    Fund Rating    Return per annum over 15 years (%)    Value of investment (Rs)    Value of Rs 9 lakh over 15 years, had it been invested at one go instead of an SIP (Rs) Taurus Discovery   *   10.80   21,31,190   15,03,771 LIC MF Equity   * *   11.09   21,83,562   19,84,711 JM Equity   *   12.58   24,78,042   32,22,665 UTI Equity   * * *   17.29   37,15,251   49,27,771 Morgan Stanley Growth   * *   18.41   40,95,826   84,63,828 Tata Growth   * *   19.83   46,37,703   49,53,895 Magnum Multiplier Plus   * * * *   21.03   51,56,455   75,85,140 Franklin India Bluechip   * * * *   27.95   94,87,199   223,45,626 HDFC Equity   * * * * *   30.63   120,17,370   247,71,497 Monthly SIP = Rs 5,000 / 15 years and Principal Amount Invested over 15 Years = Rs 9 lakh Rating as on June 30, 2010 & Returns as on May 31, 2010

This article was originally published on July 28, 2010.