SIP vs Lumpsum Which one is right for you to invest in mutual fund?

SIP or lump sum? Learn which is a better approach to investing in a mutual fund scheme

SIP vs Lumpsum Which one is right for you to invest in mutual fund?

After hitting a low of 7511 in March 2020, the NIFTY 50 rose at a blistering pace to cross 15000 for the first time in February 2021. Retail investors who had participated through mutual funds also enjoyed attractive returns. This was evident from the fact that the AUM (assets under management) of retail investors – that is, those whose investing ticket size is less than Rs 2 lakh – increased from Rs 5,56,041 crore in December 2019 to Rs 6,45,552 crore in December 2020. In fact, 86% of equity mutual funds ended 2020 by delivering double-digit returns.

As these factors continue to influence investors as they consider starting new investments or topping up their existing holdings in mutual funds, they often wonder whether it is better to invest through the SIP mode or invest lump sum amounts. In this article, we shall explore which of these modes is more suitable for investing in mutual fund schemes. But first, let us understand more about investing via SIP and investing via lump sum.

Investing via SIP

SIP stands for Systematic Investment Plan. The facility is offered by mutual fund houses under which the investor and company pre-decides the amount and interval at which the person will be financing the chosen plan. A person can choose to invest at various intervals such as daily, monthly, quarterly, etc. The most popular time frame is monthly. A minimal amount of Rs 100 is required for one to start investing in mutual funds, which makes it very affordable. Once a SIP plan is chosen, the pre-determined amount is withdrawn directly from the bank account and wisely invested. 

Investing in SIP is like buying a small slice of a big pizza. Some of the benefits of investing via SIP are:

  • The power of compounding: The power of compounding is considered to be one of the most miraculous things in the world. It helps money grow abundantly at a healthy rate of return. Compounding means that a person does not only earn money on the principal amount invested but also on the returns gained from the investment. Returns earn returns, which is not a vicious but an opportunistic circle.
     
  • Rupee cost averaging: The investment cycle moves towards two poles; bearish and bullish. In both phases, the investor’s money (that is, the original amount paid to mutual fund houses) gets averaged out. What this means is that if the market is in a bearish phase, the number of units purchased will increase; and if the market is in a bullish phase, there will be a decrease. An investor goes through these cycles and thus the optimum number of units gets averaged out as well as the cost and returns. This concept is known as rupee cost averaging.
     
  • Following a disciplined routine: As we saw, through SIP the investment’s interval and the cost are pre-determined. This means the investor will have to keep a certain amount available at all times. It helps one stay disciplined and within their limits as income minus expenses = savings (which is invested in mutual funds). This ensures that a person spends wisely and in a disciplined manner.

Related: What are stock SIPs?

Investing a lump sum
The other mode of investment in a mutual fund is through a lump sum payment, which means the investor puts up the money in one go. In other words, the entire amount is invested at once. The option of lump sum is also used in insurance, stock markets. Usually, when an investor has a lump sum corpus, they choose to invest in a mutual fund. To invest a lump sum, one needs to correctly time the market to make the best use of their resources. Lump sum investment requires particular knowledge and expertise.

Some of the benefits of investing through lump sum mode are:

  • Easier process: Investing in lump sum or one-go payment makes the process simpler, reducing the hassle of having to remember to make payments on time. It is helpful if a person wants to be a passive investor.
  • Fewer charges: The fewer the transactions, the less the charges will be. Such an investment is considered to be low-maintenance.
  • Longer term: As a lump sum payment is done for a longer period, the money invested has ample time to grow. In the long run, one can passively make adjustments to allow the principal amount to fatten.

Related: Can you beat the slowdown with SIPs?

SIP or lump sum?

Both modes of investment have their benefits. However, investors could keep certain things in mind (see table) when evaluating whether they should invest in SIP or lump sum.

Factor        SIP          Lump Sum
Direction of the market If the market is at an all-time high or trending downwards, it’s better to invest via SIP If the market is moving upwards from the bottom, it’s better to invest a lump sum
Tracking the market If you are a passive investor or a beginner, it’s highly recommended that you invest through the SIP mode If you actively track the markets, consider investing a lump sum amount at opportune moments
Type of employment If you earn a regular income, it’s better to take the SIP route If your income is irregular you can consider lump sum investments 

RelatedWhat to do with your money when your SIP matures?

Direction of the market
Historically, it has been seen that during a rising market, making a lump sum investment can offer better returns than investing via SIP. However, during an ebbing market, it is prudent to consider investing via SIP to take advantage of rupee cost averaging.

For example, as of 8 March 2021, the returns offered by investing a lump sum amount in SBI Contra Fund Regular Plan - Growth is 62.62% over the past one year. So if you had invested Rs 60,000 at the beginning of this period, you would have made an attractive gain of Rs 37,572. This means your total corpus would be worth Rs 97,572.

Investing through the SIP mode during the same period in the same fund would have offered a return of 51.79%. So if you had started an SIP of Rs 5000 during this period, you would have enjoyed a gain of Rs 19,806 on the invested amount of Rs 60,000. This means your total corpus would be worth Rs 79,806.

Tracking the market

If you track the markets regularly and are well-versed with the direction of the markets, you may be in a better position to make a lump sum investment as compared to those who are passive investors. Of course, the direction of the market is important to determine whether one should invest a lump sum, and those tracking the markets regularly have a better chance of understanding whether the markets are experiencing highs or lows.

Related: The effect of COVID-19 on your mutual fund investments

Type of employment

If you are self-employed, chances are that your income might be irregular. In such cases, it might be prudent to invest a lump sum amount. Also consider the fact investing a lump sum amount could lock up your funds and it may impact your cashflow if your income falls, especially when you may suddenly need a lump sum for certain needs. So invest in a fund where there's a shorter lock-in period or which provides liquidity and partial access to withdrawals. But if you are salaried or enjoy a regular income, you can consider taking the SIP route as you would be manage your cashflow is a systemic manner. 

To sum up, investing in mutual funds is an important aspect of creating wealth. Having a judicious mix of SIP investments as well as lump sum investments will enable diversification and reduce risk. What is Systematic Transfer Plan and how does it work? Read this article to know more about this investment option. 

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