November 28, 2020
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Finance

SIP VS LUMP SUM INVESTMENT: WHICH IS THE BEST WAY TO INVEST IN MUTUAL FUNDS?

 

An investor is bestowed with several investment choices. Apart from choosing between several investment options, an investor is also provided with two different methods to invest in mutual funds, namely – SIP and lumpsum. This article will help you comprehend the two distinct ways of investment and choosing the apt investment mode for your portfolio.

What is SIP?

SIP or Systematic Investment Plan is a means to invest in mutual funds. Under SIP investment, a pre-determined sum of money is invested at regular intervals for a fixed period in desired mutual fund schemes. The periodicity of the SIP investments can be daily, monthly, quarterly, annually, etc. SIP is a disciplined form of investing, wherein regular and automated investments are made against a particular scheme.

What is lumpsum?

Under a lumpsum investment, a significant amount of money is invested in a particular mutual fund scheme in one go. This method is generally selected to create surplus liquidity and wealth. Unlike SIP investment, this method entails the investor to time the market. This mode of investment is usually recommended when the markets are continually growing.

Let’s understand these investment concepts with the help of an example. Imagine there are two different cricket teams – Team A and Team B, playing a one-day match. Team A has a player who prefers to accumulate runs progressively in singles and twos. At the same time, Team B’s batsman tries to score maximum runs rapidly. Team A’s or accumulator’s approach is perceived to be less risky, and they would often make a reasonable score, even on a bad pitch. Conversely, Team B’s or attacker’s strategy might be considered highly risky. On a good wicket, they might be able to outscore their opponents easily. However, on a bad day, Team B could collapse badly and lose the plot.

In the investment world, Team A’s or the accumulator’s strategy is akin to an SIP investment. However, the attacker’s or Team B’s approach is similar to lumpsum investment.

SIP vs lumpsum

Here is a table that differentiates SIP from lumpsum investment

Parameter Lumpsum SIP
Cashflow Once Regular
Risk appetite Moderate-high Low-moderate
Time of investment Subject to your investment goals and market volatility Subject to your investment goals but somewhat immune to market conditions
Uncertain future income Relatively recommended Not recommended
Cost of investment High (requires a significant one-time investment) Less (thanks to rupee cost averaging)
Flexibility of investment Low High

 

What should you choose? SIP investment or lumpsum investment?

Choosing between lumpsum and SIP mutual fund investment depends on your personal requirements. Factors such as income, financial stability, risk appetite, investment horizon and financial goals play a significant role in determining the route of your mutual fund investment. You can also use a mutual funds return calculator to understand the returns on your investments.

That being said, experts believe that SIP investments are superior to lumpsum on two counts: they can help you ride the market volatility and be an ideal investment option even for new investors as they do not require regular monitoring of financial markets. Happy investing!