Lump Sum Vs SIP – Which one is the smart choice?

Investment is a long journey and one can only choose the strategy they find best. One of the most important instruments of investment is Mutual funds. You can invest in Mutual Funds either as Lump-sum investments or SIPs. This blog explains mutual funds and their modes of investment. 

What are Mutual funds?

As per definition, Mutual funds are funds pooled from different clients and are managed by the fund manager. This collective fund is then invested in various investment instruments like equities, debt, bonds, and more. Hence the diversification in Mutual Funds – Debt Funds, Hybrid funds, Equity funds, etc. But how to invest in mutual funds? 

You can either choose lumpsum investment or SIPs. You should check your risk appetite and cash flow before choosing the mode of investment. There is never one solution in the investment world. Different approaches suit different people. Here is the complete guide to assist you in choosing your investment mode.

Lumpsum investment: 

Want to invest a large sum of money? Then lumpsum investment is for you. Lump Sum payments, as described by the name, are paid in a lump. This type of investment allows customers to buy more units in a mutual fund and that in turn is compounded and provides investors with fruitful returns. 

SIP investment:

Systematic Investment Plan or SIP is an investment instrument through which investors can invest daily, weekly, monthly, quarterly, or half-yearly in a mutual fund. Plans with investment amounts as little as INR 500 per month, SIPs have been a desired investment juncture for many. If you are a newbie to investment and aren’t sure where to begin, then SIPs are for you. Ideally, SIPs allow periodical pumping of money in your preferred MF. 

Comparison of Lump sum and SIP investments

Lumpsum SIP
Less flexible More flexible
Most lump sum payments are long-term so, no need to monitor the market periodically Monitoring of the market has to be done periodically
Lump sum investments are highly reactive to market volatility SIPs are not very reactive to market volatility
Investments are made in a single go Investments are made periodically

Advantages of Lumpsum investment:

  1. Lump Sum investments are usually done as long-term investments. Ideally, a large amount is invested in a single fund and is left for the long term. Therefore, the investor need not worry about the small dips in the market. This type of investment is suitable for investors with experience in the market. Investors who can predict the market can easily invest in lump sums for the long term.
  2. As the investment is done for long-term benefit, the investor need not check the market periodically for highs and lows. They can invest their money in bulk and can wait for the money to multiply at their own pace. 
  3. With lump sum investments, you can make use of the market falls and buy Mutual Fund units in bulk. This exponentially increases your portfolio value. We all know “greater the investment, greater the returns”. Hence, lump sum investments have the potential to gain greater profits. 

Advantages of SIP investment

  1. Are you a salaried employee and want to invest a percentage of your salary in MF? Then SIPs can help you. SIPs can be made from a minimum amount of Rs.500 per month. Therefore, SIPs are ideal for everyone wishing to start the investment journey.
  2. SIPs develop a disciplined habit of investment. Due to the periodical investments, the requirements are reduced. The investors can now plan their investments based on their requirements and risk potential.
  3. With SIPs you can invest in more than one Mutual Fund based on their performances. You can always shift from one MF to another at any time. Hence, risks in SIP investments are comparatively lesser. 

However, like any other investment, MF also possesses certain risks. Market uncertainty is a factor that cannot be excluded from the risks associated, but Mutual Funds reduce the risks involved significantly. But, the historical data of the stock market has always shown rises after the market dips. SIPs will help you stay focused in case of a bear market whereas lump sum investments during market falls can scare you and you might be tempted to withdraw your investment. Similarly, a Lump sum investor can invest in one go and stay worry-free. But in SIP, the investor has to pay periodically and have to be aware of market trends.

Who should invest in what?

There is no one answer when it comes to investment. Before starting your investment journey, there are certain factors to look into. Some of the important factors are 

  1. The amount being invested: A big amount can be invested in a lump sum and if you don’t have a large sum of money, don’t wait till you accumulate one. Start with a SIP and build your wealth. 
  2. Understanding of the market: If you have a better understanding of the market, you can invest in lump sum investment. If you are not very good at graphs, you can start with a SIP. 
  3. Type of fund: Equity funds involve high risk and are suitable for SIPs. In the case of debt funds with low risk, you can do a lump sum investment. 

Like how a carpenter shapes a table according to your directions, a wealth manager or an investment coach could be the one person to understand your investment needs and suggest the same.

Final thoughts: 

To summarize, the investor should be able to analyze his style and his goals properly. With that said, any type of investment done with expert advice and goal setting can give you good returns over time. Start investing and voila, you are good to go!!! 

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