Though the idea reaps returns, funds/markets have to satisfy certain conditions to make them work.
SIP will work well over an investment period only if the two below-mentioned conditions are satisfied:

•    Many of the purchases are made at a declining phase of the market;
•    The market eventually turns up.

While history may not repeat exactly the same way in future, it does give us little more confidence to follow a strategy whose success in the past was not random. So let’s look at when SIP worked. The five-year period from February 2000 to February 2005 was the best period for SIP, compared to a lump-sum investment —even though at the starting period, the market was at its peak. The Sensex dipped from over 6,000 to below 2,600 before moving back up again. A lump-sum investment at the start of the period would have earned you 4.27% whereas a SIP would have fetched you as much as 21.47% (IRR). This was a period, which boosted the returns for the seven-year and 10-year SIPs which started around the same time.

The volatile period from January 1994 to December 2003 was an ideal period as well, for SIPs. This period gave several opportunities to buy low. In this 10-year period, a lump-sum investment would have earned 5.73% whereas a SIP would have done better with an IRR of 9.27%. A five-year SIP between January 1995 and December 2000 would have returned 17.24% compared to a lump-sum, which would have gained just 9.75% in the same period.

What are the lessons? The value of your SIP—like your lump-sum investment—depends when you start and end with respect to the market. You cannot predict where the market will end up three, seven or 10 years from now, but what is within your control is starting the SIP when times are more favourable. Start your SIP when the market valuation is low, or at least not high —as is probably the case now. Does this sound like you have to time the market? True. But isn’t SIP touted to be a reason for avoiding market-timing, which is inherent in lump-sum investment? Yes, it is. But, as we have demonstrated, you cannot get great results by ignoring market valuation. If fund companies and distributors push you into SIPs, irrespective of the market valuation, it means that they either haven’t tested this or are not telling you the truth.