Systematic Investment Plan

OneTime Investment vs SIP

SIP Vs OneTime Investment

It is well known fact that SIP (rupee cost averaging) is great for achieving good returns. It is better suited to volatile markets. In a bullish market SIP may not return best returns compared to

OneTime Investment. 2006 was a bullish year and the returns delivered from SIP are not the best compared to OneTime Investment.

Example:
Fund Name : Sensex Index Fund

OneTime Investment:
Investment Date : Jan 1, 2006
Investment Amount: Rs 1,20,000/-
Value on Jan 1, 2007 : Rs 1,72,653/-
Percentage Gain : 30.5 %

SIP:
Investment Amt: Rs 10000/- on 1st of Everymonth -Totalling Rs 1,20,000/-
Value on Jan 1, 2007 : Rs 1,46,643/-
Percentage Gain : 22.2 %

In the year 2006(bullish), SIP the above fund returned 22% as compared to 30% of OneTime Investment. So, it clearly shows that in a bullish market SIP might not be a best idea. But what happens if the market crashes the next day you have invested your money. , then SIP is the best one to average the cost.

To evaluate this, I have done a simulation on SIP and OneTime Investment. I'm pleased to provide the results. Please let me know your opinions on this.

Assumptions:
1. Market movement is assumed to be random with equal chance profit and loss
2. Monthly profit/loss range is limited to -10% to 10%
3. This analysis holds for period of 1 year

Method:
OneTime Investment:Rs 1,20,000 /- is invested at one go in the market at NAV of Rs 10/-
SIP : Montly Rs 1000/- is invested at NAV which is calculated on random function (-10% To 10% profit ) - totalling Rs 1,20,000/- for one year.
At the end of 12 months, the final amount is calculated in both investments (OneTime and SIP)
Since the market is based on random movement with equal chance of profit and loss, at the end of year, either SIP or OneTime investment perform better than the other.

This whole action( I call it one Trial) is simulated for 100000 times. This method results the outcome of 100000 simulations and which one performs better most of the times.

Resuts:
Out of 100000 simulations, 21074 times( i.e 1 out of 5 trail ) OneTime Investment gave high returns compared to SIP. And SIP scores over OneTime Investment in 78926 times ( i.e 4 out of 5 trials).

Another comparision of performance of OneTime and SIP investments for 100000 trails.
In 54,082 trials, OneTime investment gave negative returns, while SIP method gave negative returns for 26189 times for one year investment This explains the events, if the market crashes after oneTime investment.

There is one more interesting factor, OneTime investment gives high returns (over 30%) more number of times than SIP investment assuming bullish markets.

Please find the attached screenshot of the details.

All these simulations consider a time frame of 1 year. The probability of greater returns for OneTime and SIP is 1:4,
If the timeframe is increased to 5+ years, then the probability of greater returns for OneTime and SIP is 1:2


Conclusion:
As per the above analysis, SIP scores over oneTime investment. If you have huge amount to invest, Better invest regularly in small amounts using SIP in Equity.

Comments are welcome. Please correct me if I'm wrong.
Pretty good analysis, but heavy risk comes under 1 time investment, as you can see from the chart (as well as interpretation) itself that there is high number of lumpsum in negative returns. Moreover, there's high number of profits (under 10%, 11to 20%, 21to 30%) are in SIP. Not bad in more than 30%. so chart clearly explains why SIP is better and affordable risk than lumpsum.
 
The systematic investment plan ( SIP Plan) is gaining much popularity these days because of the option to invest in instalments and yield returns that are higher than the regular bank investments. The investor can choose the tenure and make investments in Kotak Mutual Funds or other companies’ SIP.
 
The systematic investment plan ( SIP Plan) is gaining much popularity these days because of the option to invest in instalments and yield returns that are higher than the regular bank investments. The investor can choose the tenure and make investments in Kotak Mutual Funds or other companies’ SIP.
 

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