Lumpsum vs SIP: Know the advantages
There are two ways to invest in a mutual fund scheme – a lump sum investment or a systematic investment plan (SIP). The lump sum investment consists of a single payment, while in the SIP a specific fixed amount is invested daily, monthly, quarterly or biannually, in your choice of mutual fund scheme/s. A lump sum investment requires you to invest of a considerable sum in equity, debt, fixed income and other such funds, depending on the objective and tenure of investment, and the risk you are willing to take.
If you are wondering which form of investment will give you better returns, it is important to understand the conditions of the market first. When the trend is upwards, the lump sum mode of mutual funds is more likely to offer higher returns. But, if the markets are falling or volatile, it is wiser to invest via SIP, which is more likely to be more lucrative in those conditions.
Advantages of SIP
Here are a few advantages of the Systematic Investment Plan
During the rise and fall of markets, SIPs aids in spreading your investment over time. If you were to make a lump sum investment, your money would buy a lesser number of mutual fund units when the markets are up, and more when the markets are going downwards. Hence, SIPs helps you lower the average cost of investment, while also reducing the risks. This is regarded as rupee-cost averaging.
Power of Compounding
SIPs helps you get the benefits of compounding since you are earning returns on the returns generated by the investment you made.
SIP investments are less stressful, hence making it an ideal choice for people new to investing in mutual funds. Markets fluctuations can sometimes make you panic and withdraw your money, for fear of further loss, in case of a lump sum investment. This is less intense in the case of SIP because the money invested is spread across time.
Auto Transfer mode
When you set up SIP, you can also activate the auto-transfer mode. This way, you need not remember the exact date of investment. You can simply provide standing instructions to your bank to have the sums debited from your savings account, towards the SIP investment.
Ability to diversify
Since SIPs require small amount instalments; you can easily diversify your investment. You can invest in a number of different mutual funds through SIP, which further enables you to mitigate your risks. For instance, if you have ₹8,000 to spare each month, you can invest ₹2000 in 4 different SIPs and diversify your investment.
Benefits of Lump Sum Investing
Here’s how lump sum investments can prove beneficial
Investment of big amount
The lump sum mode of investment lets you invest a sizeable amount. Because of this, when the markets show an upward trend, the investment value also increases exponentially, as compared to SIP investments.
Ideal for long-term investment
The lump sum mode of investment is better suited to people who prefer to make long term investments. If you are making a lump sum investment, you can consider investment tenures of a decade or more. In case of a lump sum investment you can choose a suitable type of fund as per your need.
The lump sum mode is more convenient for people who have a large sum of money they wish to invest. Since you do not have to make the investment on a pre-determined date, you can invest the sums conveniently, whenever you have access to a lump sum amount.
Invest for the timing
Whenever you wish to make a long term investment, you should always look at the market timing closely. The best time to invest is when the market is already low, and is showing potential for growth. In this scenario, you are likely to earn greater returns through the lump sum mode. If you invest a lump sum amount when the market is already at a peak, you are more likely to incur a loss.
As is apparent, there are equal benefits for SIP and lump sums investments alike. The former is ideal for new investors who have little savings, whereas the latter is for those who have adequate knowledge about the mutual fund world and decent sums to invest. It is always a good idea to begin with SIP investments and then, as you get comfortable, move to lump sums, if you so prefer.
Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.