SIP vs Lump Sum: Which Investment Method is Better

Summary

There are two ways in which you can invest in mutual funds- investing through SIP or making a lump sum investment. But is one better than the other? What should you select? Read on to know the answers to these questions.

Several reasons make mutual funds an excellent investment option. One of the biggest reason is the availability of SIP and lump sum option. But, is SIP better than lump sum investment? Or is it the other way around? Understand the difference between SIP and a lump sum to make the right decision:

What is SIP?

Systematic Investment Plan (SIP) enables you to invest a fixed amount in a mutual fund of your choice every month for a fixed duration. For most schemes, the minimum SIP amount is Rs. 500. Investors are required to submit the NACH mandate at the time of starting a SIP, which enables the fund house to debit the SIP amount from the bank account of the investor on a fixed date every month.

What is Lump Sum Investment?

As the name suggests, with the lump sum option, you get to invest a lump sum amount in a mutual fund scheme of your choice. You are free to select any amount and then withdraw the same anytime you like if you have invested in an open-ended scheme. But note that some schemes, like ELSS , have a lock-in period.

Now that you have a brief understanding of both these investment options let us take a look at the benefits to help you select SIP or lump sum:

Benefits of SIP

• Highly Affordable-

  With a minimum investment of only Rs. 500/month, SIP enables you to begin your investment journey.

• Power of Rupee Cost Averaging-

  As the SIP amount is invested throughout the year, Rupee Cost Averaging helps in reducing the average price of the purchased units.

• Disciplined Investing-

  As the SIP amount is automatically deducted from your bank account, SIP is a great way to add more discipline to your investments.

• Less Stressful-

  SIPs eliminate the need for you to time the market. You can invest a fixed amount every month throughout the market cycles.

Benefits of Lump Sum Investment

Example:

If you make a lump sum investment of Rs. 300,000 in an equity fund for five years that delivers 12% returns per year, the expected returns would be around Rs. 5,25,000. Break it down into monthly a SIP of Rs. 5,000/month in the same scheme with the same returns for five years and the returns would be close to Rs. 410,000 at the end of 5 years.

• Power of Compounding-

  With a minimum investment of only Rs. 500/month, SIP enables you to begin your investment journey.

• Taking Advantage of Market Corrections-

  If you are a skilled investor, you can invest a lump sum amount during market corrections. This will help you purchase more units at a lower price.

• Better Control on Investment-

  With lump sum investment, you can switch between schemes based on the market conditions and earn higher returns. But, this again requires considerable investment experience.

As can be seen above, SIP and lump sum investment both have their benefits. The selection depends upon what suits you better. WhileSIPs are more pocket-friendly and more comfortable to begin, the lumpsum investment can generate higher returns, especially in bull markets. But do note that making the best use of lumpsum investment requires significant knowledge and experience.

So, if you are new to mutual funds and planning to invest in something like an equity scheme, SIP might be a better option. You can always consult a financial advisor to help you make the right decision.