Lump Sum Vs SIP
Mutual funds allow you to invest for your long-term financial goals and earn inflation-beating returns on them. You make a few choices. One of them is choosing your mode of investment. You can make a one-time investment as a lump sum or choose to invest periodically via a Systematic Investment Plan (SIP).
In this article, we have conducted a thorough comparison between Lump sum vs SIP to help you evaluate what would work best for you. Let’s get started.
What is a Lump sum?
A lump sum refers to a one-time investment made by an investor in a particular mutual fund scheme. This method allows the investor to make a bulk investment in one go. The minimum amount for a lump sum investment varies across mutual fund schemes, but it’s usually something between the range of Rs. 1,000 to Rs. 10,000.
Investors usually make lump sum investments in mutual funds when they have liquid cash in hand or if they want to time the market.
What is a SIP?
The SIP, or Systematic Investment Plan (SIP), is a method that allows the investors to invest fixed amounts at fixed periods in the mutual fund schemes of their choice. The SIP works just like a recurring deposit bank account. SIPs are beneficial for those who want to invest small amounts at regular intervals.
When you set up a SIP with a mutual fund, a fixed amount is debited from your bank account on a pre-determined date every month. This amount is then used to purchase the units of the mutual funds (as per their current Net Asset Value) chosen by you.
Which one should you choose?
Both these methods of investing in mutual funds have their pros and cons. You need to look at your investment profile and decide which one would work better for you.
Advantages of the lump sum
- The lump-sum method for investing is more suited for investors who want to invest a significant amount in one go. If you have substantial liquid funds in your hand, you can invest it as a lump sum and allow it to grow for a long time.
- Another significant advantage of lump-sum investing is that it allows the investor to time the market. For example, many financial experts say the best time to invest in the market is when it is already low, and this can only be done via lump-sum investing.
- If you have surplus cash and want to invest for a long-term goal, then the lump sum method would be your best option. For example, you can invest, say, Rs. 10 lakhs today for your child’s professional education 15 years later.
- Lump-sum investment is more convenient for some investors. It allows them to invest their money according to their needs and financial commitments.
Advantages of SIP
- The most notable advantage of a SIP is that it allows the investor to make smaller savings at regular intervals. It also brings a sense of financial discipline to them. It means that you can start a SIP even if you don’t have too much money. Some mutual funds allow you to create a SIP as low as Rs. 100 per month.
- With SIPs, investors do not have to time the market. It means that if you don’t have adequate knowledge or time to keep a watch on the market, you can choose to invest through a SIP. Your investments would get spread between the rising and falling markets, and you will be able to earn the benefits of rupee cost averaging.
- Regular investments made through SIPs can become a significant corpus over a long time. For example, if you invest Rs. 2000 in a mutual fund offering 12% annual returns on an average for 20 years, you can accumulate approximately Rs. 50 lakhs. This is called the power of compounding.
- SIPs are the less stressful method of investing in mutual funds. You are not required to do anything once you’ve signed for the auto-debit facility with a fund house. Your money would automatically get deducted from your bank account for your SIP investment every month.
The final word
As apparent, both lump sum and SIP have some limitations as well as advantages. If you want to make small but regular investments, you can take the SIP route. However, if you want to invest larger amounts and time the market, lump-sum investments would be more beneficial for you.
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