SIP or lump sum are two investment tools that can help you invest in the mutual fund of your choice and achieve your objectives. Both differ on various grounds. Mentioned in this post are details about these tools and how they differ. Keep reading to make an informed decision.
Investors are always searching for the best mutual fund that aligns with their financial goals and risk appetite. While selecting the right fund is one part of the job, the other part is to select the right investment style, namely, the lump sum or SIP. Both come with their own pros and cons, and deciding between the two can be a tough choice for mutual fund investors.
Let’s understand what these are and how they differ.
What is SIP?
The term SIP is an acronym of ‘Systematic Investment Plan’ and is one of the popular investment tools. A daily, weekly, monthly, quarterly, or half-yearly commitment is made to invest in a mutual fund of your choice. A decided amount gets deducted from the bank account for investing in the selected mutual fund scheme—this way, a cumulative investment brings consistent returns over time. New investors, especially those who have regular cash inflow, can take benefit of methodical investment in SIPs.
Benefits of SIP
- SIPs can be started with a periodic investment of as low as Rs 500/month
- Convenient regular investing on a daily/weekly/monthly/quarterly/half-yearly basis
- A consistent way of saving and investing
- Instils financial discipline
- An effective way of accumulating wealth even with smaller amounts
- Accruing substantial funds with the power of compounding
- Lesser impact of market volatility because of Rupee Cost Averaging
What is Lump Sum Investment?
Investing a large amount of money in one go is a lump sum investment. After gauging the financial market, the investor parks all his funds into a single mutual fund scheme. Generally, lump-sum investment is made by investors who want to invest a large amount into a single mutual fund of their choice.
Benefits of Lump Sum Investments
- Building of a sizable fund with the power of compounding
- Benefitting from the upward market movement since the big amount is invested
- No need to invest regularly or periodically.
SIP Vs Lump Sum: A Comparative Study
| Parameters | SIP | Lumpsum |
| Market Conditions | SIPs prove to be a better investment option as there is no need to keep a close eye on the market. This is because of the Rupee Cost Averaging (RCA), where lesser units are bought when the markets enter a bullish phase and more units are bought during a bear run. | Lump-sum investments are known to give better results when investment is made during low market conditions, especially if the holding period is low. |
| Investment Amount: | SIP can be started with as little as INR 500 every month. | For lump-sum investments, a minimum of INR 5,000 would be needed. |
| Compounding Effect | The power of compounding is spaced out on each of the periodic investments. | The power of compounding affects your entire investment from day 1. |
| Risk Tolerance | It is usually recommended for investors with a low-to-medium risk appetite. | Lump-sum investment is best suited for investors with a slightly higher risk appetite. |
| Fund Availability | It is recommended for investors who have a regular flow of salary or income. | It is recommended for investors with an ad-hoc or irregular flow of income. |
Investing in a SIP or a lump sum investment plan primarily depends on the investor’s risk appetite, income, financial stability, and investment goals. Either way, save and invest in the best investment plan in India to grow your wealth and achieve your goals.