SIP vs lump sum is a famous debate that you might hear everywhere. Some say SIP is good for investing in regular installments while some say lump sum is good for earning higher returns on the one-time invested capital. In this blog, we’ll go through the differences between SIP and lump sum and which is a more suitable way for you to invest in mutual funds.
What is SIP Investment?
A SIP (Systematic Investment Plan) in mutual funds is similar to your piggy bank where you put money every day or week to give a gift to your loved ones. In SIP, you invest the pre-decided amount in mutual funds wherein the frequency could be weekly, monthly, quarterly, or half-yearly. SIP allows you to start the investment with a minimum of ₹100 or ₹500.
The whole process of SIP is automated. You give the mandate (or authorization) to a fund house or stockbroker for a specific mutual fund, mentioning the frequency and amount. The set amount will be debited from your linked bank account and units will be credited to your demat account or mutual fund account. So, open demat account now with SMC Global Securities and start SIP investment anywhere, anytime.
What is lump sum investment?
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- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
It is important to know the meaning of lump sum in this SIP vs lump sum argument. You spend your windfall gains like bonuses, dividends, etc. on traveling or shopping. Instead of this, you can invest this amount in one go in a mutual fund to create wealth in the long run.
Lump sum is the approach where your invested money works for you and over the years you will get higher returns if the market conditions are favorable. In lump sum, you can start with a minimum investment of ₹1,000.
SIP vs Lump Sum: Points of Differences
Let’s break down the key differences between SIP vs lump sum investments.
Investment Philosophy
The investment philosophy behind the two is that SIP investment allows you to start with a small amount and in periodic intervals as well. A lump sum investment is totally opposite of SIP and allows you to put money at a point in time.
Flexibility
In the SIP vs lump sum space, SIP provides greater flexibility to the investors because you can start with a lesser amount and increase it over time when your income increases. Lump sum requires a one-time upfront investment and it cannot be changed after investing.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Also, SIP can be paused or stopped anytime which you can resume as per your requirement. In lump sum, you either need to redeem all the units or take the withdrawals in regular intervals through SWP.
Market Timing
Market timing means analyzing the right time to invest with the changing NAV every day. SIP investment is safeguarded from market timing issues as you can invest any time and over time, the cost of buying will get averaged. In lump sum, you need to time the market and it is difficult to pick the exact price point to buy.
Rupee Cost Averaging
Rupee cost averaging shows that the total cost of buying the units in periodic intervals will be averaged. In SIP investment, you get higher units when the NAV of a mutual fund is low and fewer units when the NAV is high with the same amount of installment payment. Overall, the cost of buying the total number of units will be averaged, and hence the impact of changing NAVs will be lesser.
In lump sum, you need to buy the units at a single point in time and you cannot get the benefit of rupee cost averaging.
Ideal Time Horizon
The ideal time horizon of the investment may differ based on the investor’s investment objective. It is generally said that SIP is more beneficial for long-term goals like child education or marriage or retirement planning by starting off regular investments from a young age.
While a lump sum is said to be more suitable for short-term goals like buying a car in a few years, it can be chosen for a long period as well.
Financial Discipline
SIP investment is good for maintaining financial discipline in this busy lifestyle as the amount is automatically deducted from your bank account and it is invested without any eye keeping.
Lump sum, on the other hand, requires you to invest in the one go and with the rise in the cost of living, you might not keep it as a priority or always push it to sometime later.
Risk Profile
The risk profile of SIP is low to moderate because the investor can take charge of their investments at any time and choose to stop it when things don’t seem right. Also, spreading out investments and averaging will minimize the risk. In lump sum, the risk can go from moderate to high with the investment already done and then keep it on the edge of market fluctuations.
Here is a summary of the key points on SIP vs lump sum:
| Points of Difference | SIP Investment | Lump sum Investment |
|---|---|---|
| Investment Philosophy | Installment | One-time |
| Flexibility | High | Less |
| Market Timing | Not Required | Required |
| Rupee Cost Averaging | Yes | No |
| Ideal Time Horizon | Long Run | Short Run |
| Financial Discipline | Yes | No |
| Risk Profile | Low to Moderate | Moderate to High |
SIP or Lump Sum Which is Better?
With the set of differences between SIP vs lump sum, it is clear that both ways are good in their own way and there is no definite answer to which is better. But there are some points based on which you can decide your mode of investment in mutual funds.
Flow of Income
For a salaried individual, SIP is better to invest a small amount every month while a lump sum is ideal for people who hold an irregular source of income such as business owners or freelancers. However, if you have a huge amount of cash flow lying idle, it is wise to invest in a lump sum mode rather than SIP.
Investment Objectives
For investment objectives like child education, dream home, buying a car, or retirement corpus, you can decide from the SIP or lump sum way. If you are in your 20s, then it is better to start with SIP for retirement planning but if you have crossed your 40s, a lump sum is much better. Similarly, for achieving a specific objective, it is recommended to consider the time period and your budget to make a choice between SIP and lump sum.
Mutual Fund Type
Finding a SIP or lump sum which is better is also dependent on the fund type. NAV of equity funds tends to change more because their main invested component are stocks which are highly volatile. While debt funds invest in bonds which are less volatile. So, SIP is a better way to invest in equity funds to benefit from rupee cost averaging and a lump sum is suitable for debt funds.
Market Nature
When the markets are rising, a lump sum is more recommended than a SIP investment because you tend to gain more on the invested capital through the power of compounding. In the bearish market, SIP is better because you can buy higher units with the same investment amount.
Portfolio Size
Your overall portfolio size can also help you decide on the SIP or lump sum mode. Suppose your overall portfolio size is ₹10 lakhs and you want to invest in ₹50,000, then you are taking the risk of only 5%. If you choose to invest through a lump sum in this case, then the impact of volatility will not be highly significant.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Suppose your portfolio size is ₹1 lakh and if you invest ₹50,000 through lump sum, then the investment risk is huge. Hence, it is better to take a route that suits your portfolio size and you can consider taking the mixed approach of SIP and lump sum.
Conclusion
In the SIP vs lump sum differences, SIP is a way to invest in regular installments while lump sum is a one-time outlay. SIP provides the benefits of rupee cost averaging and does not require timing the market. Lump sum is good in the rising market providing greater returns but with a higher risk of losing.
FAQs
Is it better to invest monthly or lump sum?
Monthly investment is good for salaried investors who can regularly put in some portion and develop a habit of financial discipline, while lump sum is suitable for people with uneven sources of income.
Which is better lump sum or SIP?
SIP investment is good for beginners who are just starting off and have a small amount to put in. The lump sum is good for people who have a surplus amount to invest and can take a higher risk.
Can I withdraw SIP anytime?
Yes, you can withdraw SIP anytime but some funds may charge the exit load if you redeem the units before the mentioned period.
Can I invest 1000 ₹ per month in SIP?
Yes, you can invest ₹1,000 per month in mutual funds through SIP to start with small and then later on, you can increase the installment amount.
References:
https://www.news18.com/business/sip-vs-lumpsum-returns-mutual-funds-8528353.html
https://images.livemint.com/r/LiveMint/Period1/2014/10/27/Photos/w-this-or-that.jpg
https://www.livemint.com/money/personal-finance/should-you-invest-via-lumpsum-instead-of-sips-when-market-corrections-are-steep-151673264314240.html