Lumpsum Vs SIP

Mutual Fund

To invest in mutual funds, there are two methods of investing. One is Lumpsum Investment and the other one is SIP.

When you invest a certain amount of money at one go, to buy units in the mutual fund, it is known as Lumpsum Investment. The other method of buying units in a mutual fund is through SIP. SIP stands for Systematic Investment Plan. SIP involves regular and continued investments after a regular interval of time which may be monthly, quarterly.

Let us explain the two methods of investing with the help of an example.

In case of lump sum investment, you invest at one go, say Rs. 20,000 annually.

In case of SIP, you invest a certain amount say, Rs. 3,000 every month.

Now let’s compare between the lumpsum investment and SIP.

  • Disciplined Investment-When you invest in mutual fund through SIP, you will develop a habit of regular investment which instills a sense of disciplined investment. But when you invest a lump sum amount at one go, you will not develop a regular habit of investments.
  • Past Performance-Lumpsum investments yield high returns to its customers. In case of SIP investments, you earn a good amount of return, if you invest for a smaller time period say, less than 5 to 6 years. But if you invest more than 5 to 6 years through SIP, you tend to earn a persistent higher return.
  • Market Volatility-With regular investments through SIP, fund managers allocate your money over time and only a small portion of your whole investments faces the market volatility. But when you go for a big lump sum investment at one go, there is a risk of losing a big chunk of your investment when the market is down. Also, you tend to enjoy high return when the market is high.
  • Convenience-If you are a kind of person who tends to spend a lot, then it’s highly advisable that you go for lump sum investments. But if you are someone who can customize his spending nature, then you can easily go for regular investment via SIP.
  • Rupee-Cost Averaging-The concept of rupee-cost averaging suggests that when you invest at regular intervals over a period of time, then you tend to buy more units of mutual funds at a low price thus lowering the average cost per unit in the long run.

During the bearish market, the fund manager can buy more units and during the bullish market, they can sell the units at a high price. But in lumpsum investment, there is no benefit of rupee-cost averaging.

  • The benefit of compounding- When you invest regularly via SIP, even if you invest a small amount, you tend to earn a high return This is because you earn interest on interest which helps in wealth creation. This is called the power of compounding. But you don’t enjoy this benefit while investing through lumpsum investment as you need to invest regularly for a longer duration of time.

So, lastly, if you are moderate risk seeker and aims to build a certain corpus, then you can easily go for regular investment through SIP. If you are an aggressive risk taker with a big amount of disposable income, then you can easily opt for lump sum investment.

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