Systematic Investment Plans and lump sum investments are two ways you can invest in mutual funds. New investors often find themselves wondering which between lump sum vs sip is more suitable for them. Both these approaches have their own advantages and disadvantages and suit different investors and market conditions. So if you’re asking yourself which is better sip or lumpsum investment, you’ve come to the right place!
We’ll understand how these options work and also take a deep dive into the differences between sip vs lump sum investments, so you can choose the option that matches your needs.
What is SIP (Systematic Investment Plan)?
Systematic Investment Plan, or SIP, is the more affordable and less risky method of investing in mutual funds. The way it works is simple – You invest a fixed amount of money regularly (weekly, monthly, quarterly, or semi-annually), into a mutual fund of your choice. On the predetermined date, the money gets deducted from your linked bank account and gets invested in the fund at the prevailing Net Asset Value (NAV) on that particular day.
The NAV of a fund gets updated daily, so the fluctuations in NAV affect the number of units you receive for your investment. For example, let’s say you invest Rs. 10,000 every month. When the NAV is lower, you will get more units for your investment amount, and when the NAV is higher, you get fewer units for the same Rs. 10,000. This is called rupee cost averaging. Investing through SIP allows you to spread your investment across different market conditions and over the years, it helps you to lower the average cost of your investment. The need to time the market is thus eliminated.
What is Lumpsum Investment?
On the other hand, a lump sum investment allows you to invest a large amount of money in one go instead of making staggered investments with an SIP. Making a large, upfront investment offers some advantages over SIP, but also suffers some disadvantages. When timed right, that is, during a bullish run, lump sum investments can help investors earn much higher returns compared to SIPs. Your entire amount also gets invested from the start, so the full capital has more time to benefit from market growth.
However, a lump sum approach can be very risky if the market takes a downturn shortly after you invest. This exposes your entire capital to volatility.
Key Differences Between SIP and Lumpsum
Let’s have a look at the difference between sip vs lumpsum mutual fund investments:
| Factor | SIP | Lump Sum Investment |
| Investment Approach | Investment is staggered and made in smaller, fixed amounts over a time period. | Meanwhile investing a lump sum means committing a large amount of money in a mutual fund in a single go. This is the main sip and lumpsum difference. |
| Risk | SIPs are comparatively less risky as investments are spread out. | Because the entire amount is invested in a single go, the chances of losing money due to market exposure are increased, making lump sum investments riskier. |
| Rupee Cost Averaging | SIPs allow investors to take advantage of rupee cost averaging. | No rupee cost averaging benefit for lump sum investments. |
| Investment Amount and Accessibility | Since the investment amount is small, the entry barrier for SIP is much lower compared to lump sum investments. | A large amount is invested in one go, which makes lump sum investments more suitable for those with surplus funds. |
| Flexibility | SIPs allow investors to alter the contribution amount as per their financial situation. Some SIPs even allow investors to temporarily pause investment, an option which can come in handy during financial distress. | Compared to SIPs, lump sum investments offer lower flexibility. |
| Market Timing | Investment is made on a predetermined date regardless of market conditions. The need for timing the market is eliminated. | It’s important to invest lump sum amounts when the market is bullish. When prices are rising, you can maximise the returns of your investment. |
| Financial Discipline | SIPs instil the habit of regular saving and investing. | Lump sum investments do not foster the same regular saving discipline in investors. |
| Suitable For | SIPs are suitable for investors with a limited investible surplus, for example, young salaried employees starting their investment journey. | Investors with a large investible surplus, such as individuals who have just sold their investments like properties and received a large amount of money can benefit from lump sum investments. |
Advantages of SIP Investment and Lumpsum Investment
Both these investment approaches have their own benefits. Take a look at sip vs lumpsum investment advantages:
Advantages of SIP
| Factor | Systematic Investment Plan Benefits |
| Disciplined Investing | SIPs help you build a habit of saving money regularly as they require you to invest a fixed amount on predetermined dates. |
| Accessibility | SIPs are accessible to more investors due to the low entry barrier. Through them, one can get started with as low as Rs. 500. |
| Flexibility | Investors have the option to increase, decrease, or temporarily pause their contribution amount as their financial situation changes. |
| Convenience | The investment amount gets automatically debited from your bank account on a fixed date so you don’t need to make manual transactions. |
| Rupee Cost Averaging | The NAV of a mutual fund fluctuates based on market conditions. When you invest regularly through an SIP, you buy more units when the NAV is low and fewer units when the NAV is high. Over time, this process averages out the total cost of your investment. |
| Market Timing | Investments are made on the predetermined date regardless of market conditions, so there is no need to time the market. |
| Lower Risk | The entire capital isn’t exposed to market fluctuations at once, which helps in managing risk more effectively compared to lump sum investments. |
Advantages of Lump Sum Investment
| Factor | Lump Sum Investment Benefits |
| Large Surplus | Individuals with large surplus benefit more from lump sum investments as they can take full advantage of current market conditions and earn higher returns if the market does well. |
| Early Investing | The entire investment amount starts to generate returns from the start instead of slowly building returns over time. |
| Higher Returns | When timed right, lump sum investments offer investors the potential to earn higher returns. |
Now that you know the difference between sip vs lumpsum mutual fund investments and the advantages they offer, let’s analyse which of these methods is better.
Which is Better: SIP or Lumpsum?
So is lump sum better than sip, or is it the other way around? Well, the answer isn’t quite as straightforward as you think. Choosing the right option between sip vs lumpsum investment depends on your financial goals, situation, risk tolerance, and market conditions.
SIPs are considered the better option when:
- The investor has a limited surplus.
- The markets are volatile.
- Timing the market is dangerous.
- Investors don’t have a high-risk appetite.
Investors such as salaried individuals can greatly benefit from SIP as they allow investors to slowly work towards long-term financial goals like building a retirement fund. SIPs are also the safer option when the markets are volatile because rupee cost averaging spreads the risk across different market conditions. Investors don’t have to play the risky game of timing the market and can benefit from a disciplined approach to investing.
Lump sum investments are considered the better option when:
- The investor has a large investible surplus.
- The investor has no immediate liquidity needs.
- The market condition is bullish.
Lump sum investments are better in bullish markets because the potential for big returns when the market is going up is very high. Other than these factors, one more important thing to consider when you’re asking yourself which is better sip or lumpsum, is the type of mutual fund you’re investing in. Market volatility affects different types of mutual funds differently.
For example, equity funds are more sensitive to market fluctuations compared to debt or debt-oriented hybrid funds. Lump sum investments in equity funds carry very high risk, so investors should be fairly certain of their market outlook and risk tolerance before committing a big amount. On the other hand, SIPs work well when combined with highly volatile funds.
Investors can also consider investing through a Systematic Transfer Plan (STP). With an STP, you can transfer your mutual fund investment from one fund to another. A common way investors use STP is by investing their lump sum amount in a stable debt fund and then setting up an STP which slowly transfers their investment from the debt fund to a more volatile equity fund. This mitigates the risk associated with entering the equity market all at once.
In a way, this transfer is like an SIP as it involves fixed, regular investments in a mutual fund. The difference is that instead of your bank account, the money gets deducted from your source fund, and while your money sits in this source fund, it continues to earn returns based on its own asset class.
Conclusion
The primary difference between sip and lump sum investments is that with SIPs, investors make smaller but consistent payments over a period, whereas, with lump sum investments, a large amount is invested all at once. Both these approaches have their pros and cons, and while one is not inherently superior to the other, there are conditions where one is more suitable for certain investors.
The choice between an sip vs lump sum investment ultimately depends on the investor’s financial goals, situation, risk tolerance, and market conditions. Investors should be especially careful when considering lump sum investments in equity funds because these investments are highly sensitive to market fluctuations and can lead to substantial losses if the market goes down after the investment is made.
A financial advisor can guide you through your investment journey by giving you unbiased and personalised advice. They can recommend mutual funds aligned with your goals, risk appetite, and investment horizon, as well as advise you whether SIPs or lump sum investments are more suitable based on your financial situation and market conditions.
