Should you invest in stocks through SIPs?

Mutual funds SIPs revolutionised how Indians invest since their introduction in the early 1990s. But the unpopular cousin, stock SIPs, have been in the scene for equally long.

The idea is the same. You take a fixed amount every month and invest it. However, instead of mutual funds, you invest it in a stock or a bag of stocks.

The reasons why stock SIPs did not catch on are rather simple.

With no fund manager or fund house in the picture, investors must navigate the market independently, which isn't wise for equity first-timers.

Second, if you are investing regularly in a stock or a bag of stocks, it means you have to monitor the underlying businesses constantly. Not everyone has the time or expertise to do so.

But, a more quantitative reason has been the widespread belief that lump sum investment in stocks fetches you far grander returns.

While we do agree that stock SIPs are risky and not for everyone, we wanted to test if lump sums are truly the only road to high returns in equity markets.

Lump sum vs SIPs
To put the above belief to the test, we used the BSE 500 stock universe as a case study.

First, we calculated the annualised returns of every company in BSE 500 based on the assumption that Rs 10,000 was invested in them every month for five years, starting from April 2018 to March 2023. We assumed the investments were made on the last trading day of every month.

The above monthly investments would add up to Rs 6 lakh by March 2023. Thus, we calculated the annualised returns of every company if Rs 6 lakh was invested in them in April 2018.

We found that SIPs fetched better returns for about 76 per cent of the companies.

Clearly, stock SIPs are not as hazardous to your returns as purported.

But what if this only holds true for FY18 to FY23. After all, the latter half of this decade has been anything but uneventful, and the markets have been highly volatile.

So to validate our findings further, we conducted the above exercise for two additional cases in two different time periods.

Case 1: SIPs at a market high
We assumed that the SIPs were started when the BSE 500 index was at its yearly high. We considered the period of FY07 to FY12 for this case.

To our surprise, over 90 per cent of the companies gave better SIP returns!

Case 2: You start the SIPs at a market trough
For this case, we considered the period between FY09 to FY14. We assumed that the SIPs were started when the BSE 500 index was at its lowest.

Nearly 91 per cent of the companies gave better lump sum returns in this case. Seems like when markets are at a low, it's better to take the lump sum route.

Conclusion
So here's what the data says:

1. SIPs can get you better returns than lump sum investments if started at a market peak.
2. Lump sum investments are a better option when the market is at a low.
3. When the markets are volatile, SIPs perform better.

However, SIPs and lump sums, at the end of the day, are investment plans. What earns you the return is the business you invest in. Regardless of which route you take, your primary focus should be on the fundamentals of the business, the growth potential of the company and the sector, etc. Without the underlying business performing well, whether you go for SIP or lump sum makes little difference.

Suggested watch: SIP vs lump sum investing in mutual funds