Systematic investment plan in Mutual Fund (SIP) Vs lump sum investment in Multibagger stocks

Warren Buffet – the most successful investors of all times once quoted “If you don’t find a way to make money while you sleep, you will have to work till you die”.  According to legendary investor, one of the prime objectives of wealth creation is to generate wealth passively by investing money that has been earned previously. To do so it is crucial to start early, invest regularly and diversify across asset classes. Most importantly, be patient by holding on the investment for the long term. Equity is one such preferred choice for long term wealth creation. But equity is highly volatile in the short run and in order to navigate through the volatile times, systematic investment plan (SIP) is the most popular medium.   

In addition to SIP, the stellar performance of the Indian equities in 2021 has resulted in many stocks making a place in the elite list of the multibagger stocks. Factors such as easing interest rate scenario, infra push and consumption boosting measures by the government to stimulate the economy has resulted in many stocks with good fundamentals and strong governance offering spectacular returns in the recent times. These are popularly known as ‘multibagger’ a term coined by Peter Lynch in his book ‘One Up on Wall Street’ referring to those stocks that return many times over the original investment. Multibagger stocks could be spread across different market capitalization like large cap, mid or small cap. They could be turnaround stocks (restructuring at company level or changing economic scenario offering turnaround possibilities), penny stocks (stocks trading at a very low price between Rs 1 and Rs 10) or concept stocks (stocks of those companies whose products are likely to have higher demand in the future). The ability to generate higher alpha and beat the benchmark by big margin resulted in many investors chasing the multibagger stocks for wealth creation.

So, the obvious question among several investors is where they should invest their hard-earned money – SIP or multibagger stocks?  The article attempts to compare SIP and multibagger stocks in terms of strength, expertise required and suitability along with the risk factors associated with both of them. Investors can evaluate each of them and then make a prudent choice as per their risk-return profile.  

Strength

Expertise and suitability

Risk factors

Performance

Next, we compare the performance of the SIP in the equity-oriented funds and returns of the multibagger stocks across different time frames. The table shows annualised returns for the period ended February 23, 2022 of large, mid and small cap equity fund along with large, mid and small cap multibagger stock. The performance comparison is just for the representation purpose we are not recommending any of these funds or stocks. 

Evident from the performance table, the annualised returns of the chosen multibagger stocks are highly attractive. But the SIP in the equity funds have also managed to deliver good performance. Note, that the returns of the multibagger stocks looks very promising but they are highly volatile and fall more sharply during market downfall.

Take the recent case of beginning of 2020 when the coronavirus sent shockwaves across the globe. The large, mid and small cap multibagger stocks depicted in the table above recorded fall of 34%, 27% and 49%, respectively, in the period between January 1, 2020 till March 31, 2020.  On the flipside, the returns of the large, mid and small cap equity funds fell 24%, 21% and 25%, respectively, in the same period. The fall of the equity mutual funds was less owing to diversification and portfolio managed by the experienced fund managers.  In addition, investing in equity funds via SIP during market fall ensures investors get more units per instalment and as the market recovers to positive cues they can earn better returns. 

Which option to choose?

Listing of the strength, expertise, suitability and risk factors clearly indicates SIP is more orderly approach to investment wherein smaller sum invested regularly can be rewarding in the long run and also aids in mitigating the downside risk in case of the market fall. Returns from SIP may be relatively lower compared to multibagger stocks but risk is also relatively lower. Multibagger stocks are highly risky but have the ability to deliver superlative returns. These stocks call for investment of larger sum at one go, proper research and correct timing.

Before starting the SIP, evaluate the fund performance, risk ratio and the portfolio traits. Don’t spread money across too much funds. Wisely top-up the SIP with the rise in the income levels but avoid stopping SIP during volatile times. Don’t invest in multibagger stocks on the basis of rumours or tips. Identify stocks after doing careful research, SWOT analysis of the company (strength, weakness, opportunities and threats) and overall market sentiments. At times weak market sentiments can dampen the returns of even fundamentally strong companies. Lastly, don’t think multibagger is making quick bucks in quick time. Just like SIP, multibagger stocks also calls for high degree of patience to earn optimum returns. Investors can choose either of the two option or allocate some portion of money to both the medium based on their goals, risk profile, return expectations, income levels and keep investing for the long term.