SIP vs Lump Sum which is better?
As soon as you decide to start your mutual fund investment journey, one of the first questions you need to answer is "SIP or Lumpsum?" In case you get confused by this question and wonder - what are SIP and Lumpsum, after all? So let's dive right in.
Are you also confused about SIP and lumpsum investment, through which medium should you invest in mutual funds? Both SIP and lump sum are ways of investing in mutual funds. Both these methods have their advantages and some limitations.
There is also a difference in the returns of both lump sum and SIP investment options. If you are a new investor and confused about the difference between SIP vs Lump sum, then you will get the answer to all your questions in this article. Together we will talk about how you should invest in mutual funds.
Is it better to invest in a lump sum or monthly in mutual funds?
which is more profitable sip or lumpsum
Before understanding the difference between these two, let us know about them briefly.
Systematic Investment Plan (SIP)
SIP means Systematic Investment Plan. Investment in this is done in a systematic way. SIP is such a way of investment in which we keep investing money continuously in a mutual fund scheme at fixed intervals. However, several mutual fund houses offer investors the option to invest bi-monthly, quarterly or annual apart from monthly SIPs. The best part is that you can start SIP investments with a small amount like Rs 500 or Rs 1000.
This SIP installment is debited from your bank account and credited to your mutual fund scheme. SIP is a regular investment process in which we have to continuously invest money. You can think of SIP as a recurring deposit from a bank.
Lump Sum
What Lumpsum investment is. Imagine you’re suddenly able to earn or get a lot of money altogether like a company bonus, business profit, sale of property, PF corpus, or inheritance. The decision to invest such windfall gains or large cash savings together is called Lumpsum investment.
As its name suggests, you have to invest only once in this. That is, you do not invest money in it continuously, you make the entire investment in one go. Like you have left by depositing ₹1 Lakh in One Time SBI Bluechip Fund.
You can also think of it like a bank FD in which you deposit a fixed amount and you keep getting interest on it.
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Is SIP good for beginners?
Who should invest through SIP?
Investing in mutual funds through SIP is considered a good option for investors whose goals are of long-term duration. If you also want to achieve your goals in a systematic way, then SIP is the best option for you.
Investing through SIP is easy for almost everyone. Anyone who can deposit even ₹ 500 a month can invest in SIP. He can make a return of Rs 22 lakh in 30 years with an annual return of 13% even though a SIP of only ₹ 500 months.
Whereas you would have to invest ₹46,000 in lumpsum to make Rs.22 lakh in 30 years through a Lumpsum. Which in my opinion is not possible for every class of person.
Investing in Mutual Funds through SIP can give you higher annual returns as compared to a lump sum.
For investors who want to take advantage of the returns of the stock market, SIP can be the best option. Investing at different times also keeps cost averaging in SIP.
No fear of high market in SIP
In this option, you do not have to worry at all whether you have bought mutual funds expensive or cheap. Whereas due to a one-time investment in Lump Sum, you may have made a big investment in the high market. Because of this, you may get to see negative returns for a few years in a row.
As currently, the Sensex is around 58,000 points, which is more than its average value. Therefore, it is not advisable to do a Lump Sum at such a time. However, doing Lump Sum in Mutual Funds can be a good option at the time of market correction (as seen in the initial phase of Corona Virus).
Whereas in SIP, your investment keeps getting accumulated in every situation of the market. That is why SIP is given more importance than Lump Sum.
Is it a good idea to invest lumpsum in mutual funds?
Who Should Do Lump Sum? Is lumpsum better than SIP?
In this option, you have to invest your lump sum. Due to the high investment amount, a Lump Sum is considered better for those investors who can invest a large amount in one go. It is not like in Lump Sum we can invest in any market position whenever we want. Especially in an overvalued market, a Lump Sum is not recommended at all.
Overvalued Market ???
A lump Sum is considered good for those investors who are market experts or have knowledge of the stock market. So if you are a new investor then SIP is definitely the best option for you. In this, you do not need to know at all whether the market is overvalued or undervalued.
Which is better SIP or a one-time investment?
Before we find out about the benefits of SIP, it’s pertinent to understand the fundamentals of SIPs. How do they work? When you invest through SIPs, you invest a fixed amount in installments periodically. With this amount, you purchase mutual fund units and accumulate them.
Now here’s the fun! If you continue to do this for a long time, you stay invested in the fund during the highs and lows, through which, over a period of time, your investments can absorb market ups and down and volatility impacts better and offer higher risk-adjusted returns.
I mean the performance of any mutual fund depends on several internal and external factors and the possibilities of losses due to market risks cannot be completely ruled out at any point. But, SIPs can certainly work in your favor to lower those risks to an extent.
“Compound Interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. This famous quote is by Albert Einstein.
In fact, Compounding occurs when the returns you earn on your investments start earning returns. This is a simple concept in theory. But its practical implications are substantial. When you invest regularly through SIPs, your returns get reinvested. Over time, this result in a snowball effect, that may increase your potential returns manifold, depending on the fund’s performance.
SIP Example
Imagine there are four investors: Meena, Riya, Nayan, and Rohan Let’s suppose, all of them start investing Rs. 2,000 per month in an equity fund through SIPs at the same time.
But Meena invests for 2 years, Rani for 5 years, Nayan for 10 years, and Rohan for 20 years. Assuming an estimated return rate of 12% per year, let’s understand how their investments are impacted. Remember that this is just an example to understand the concept of SIP, and actual returns might vary greatly depending on the fund’s performance.
Meena started SIP with Rs 2000 SIP and kept investing regularly for 2 years. Owing to the 12% return rate, her invested amount of Rs 48,000 grew to Rs 54,486.
Riya also started with the same monthly SIP, but she continued investing for 5 years and her final corpus became Rs 1,64,973, I.e. she earned Rs 44,973 as gains.
Nayan invested for 10 years straight and look what happened! While his invested amount was 2,40,000 only, he gained Rs 2,24,678 making his final corpus almost double his invested amount.
But you have to wait to see what happened to Rohan’s investment over 20 years. He invested only Rs 4,80,000, and over 20 years he earned Rs 15,18,296 making his final corpus more than 4 times his invested amount. Now, this is what the power of compounding is. The longer you stay invested, the better it is.
You can invest in mutual funds through a SIP with just Rs. 500 per month. This is one of the most affordable and popular ways to invest each month. You can increase your monthly investment amount with a rise in your income via the SIP step-up feature.
Mutual fund houses allow investors to top up their SIPs on a regular basis. This strategy can help you reach your investment goals at a faster rate, depending on the fund’s performance.
Now, let’s go back to Rohan’s example who invested Rs 2000 in SIP every month for 20 years, and with a 12% annual return rate, he built a corpus of Rs 20 Lakh.
Now, if Rohan stepped up his SIP amount by 10% every year, then after 20 years, while his total investment amount would be Rs 13 lakh 75 thousand, his total corpus would increase from Rs 20 Lakh to Rs 37 Lakh! Investing via SIPs offers you the advantage of rupee cost averaging. This is a concept where you purchase more units when the Net Asset Value (NAV) of the fund is low, and lesser units when the NAV is high. Staying invested for a longer period via SIPs can be better for your overall returns, as you don’t need to worry about how to time the market.
Financial Discipline is probably the biggest advantage of SIP. Instead of spending frivolously on unwanted things and then making wrong investment decisions in a haste, SIPs help you to invest systematically every month and achieve your goals. And you don’t have any reason to worry if willpower is not your strong point. Because SIPs are usually linked to your bank account and your money gets invested on a fixed date every month automatically.
Now that you’re aware of the advantages of SIPs, does this mean that Lumpsum investments don’t have any benefits? Definitely yes. Let’s discuss these.
Lumpsum investment is often perfect for expert investors who can recognize market cycles and trends. By identifying a market low at the right time and investing a lumpsum amount in an equity-oriented mutual fund, the chances of higher returns can increase.
Also, lump sum investments could be a great way to grow idle cash savings, provided such investments are in line with your goals, risk tolerance, and liquidity requirements. Invest after carefully reading all the offer documents and after consulting your financial advisor. In conclusion, both SIPs and lump sum investment modes could be beneficial for mutual fund investors. However, on certain counts, SIPs could be more beneficial in offering higher risk-adjusted returns, especially for amateur investors.
On the other hand, a lump sum could be a better fit for slightly more expert investors who can “time the market”, based on data research and not hearsay. That being said, while systematic and smart mutual fund investments could be a great way to achieve your financial goals in time, they do involve market risks varying from low to very high. As such, one must make informed investment decisions. Also, one must not hesitate to consult a certified financial advisor if one requires any help in this regard. If you are planning to invest in mutual funds then you can start your journey with Navi Mutual Funds. Navi offers multiple mutual fund schemes that cater to the diverse needs of investors.
Navi Mutual Fund Schemes are listed on all major online platforms like INDMoney, Kuvera, Groww, Paytm Money, Coin by Zerodha, and Kotak Cherry Grow Wealth, among others for investing under the direct plan.
Benefits of SIP
- You can start investing in it with just ₹ 500.
- The best option is to achieve your goal in a systematic way.
- In this, the benefit of Rupee cost averaging is available.
- No special knowledge of the stock market is required.
- Capable of building wealth rapidly with the power of compounding.
- Along with the increase in income, the amount invested in SIP can be increased.
- A disciplined investment.
Disadvantages of SIP
- When compared to a Lump sum, SIP does not have any disadvantages other than the actual returns being slightly lower in the long term.
- Benefits of Lump Sum
- The returns are good due to a large amount of investment being put to work at once.
- Investment in Lump Sum can be increased by additional investment in this.
- Faster compounding is seen over time.
Benefits of Lump Sum Investment
- The returns are good due to a large amount of investment being put to work at once.
- Investment in Lump Sum can be increased by additional investment in this.
- Faster compounding is seen over time.
Disadvantages of Lump Sum Investment
- Not the right option for everyone due to high investment requirements.
- There is no justification for getting the lump sum of ₹ 1000.
- Market knowledge is required by the investor.
- Not goal oriented.
- Investing in the high market has the potential for huge losses.
- No benefit of Rupee cost averaging.
Conclusion – Which is better SIP or Lump Sum
I have written this article here to tell you the best of Lump Sum and SIP, it does not mean that you have to choose only one. If you want, you can invest in both SIP and Lump Sum together. It totally depends on your goal.
You should invest only keeping in mind the limitations of these two. Which you must have understood from the information given above.
If still you ask me to choose between Lump Sum and SIP, then I will definitely choose SIP. Because of this, any class of person can easily invest, and that too without any market knowledge.
So, friends, I hope that you have liked this information about Which is better SIP or Lump Sum and SIP versus Lump Sum and now you will be sure with whom you have to invest. Do share this article with your friends and needy ones.
