SIP vs Lump Sum: A Detailed Comparison
One can invest in mutual funds via SIP (Systematic Investment Plan) or lump sum investments. Both these investment routes have their pros and cons, which individuals must analyse to figure out which mode is best suited for achieving their financial goals. So, which investment mode should you choose – SIP or lump sum? Continue reading to get all details regarding SIP vs lump sum.
What Is SIP?
Systematic Investment Plan or SIP involves investing fixed amounts at regular intervals in a mutual fund scheme. SIP instalments can be made monthly, annually or quarterly, depending on the type of investment plan. As the name suggests, it is a systematic or organised investment method.
It is suitable for individuals having a low investment corpus. One of the most significant benefits of investing via SIP in mutual funds is that it instils a sense of financial discipline in the investor. One gets habituated to regular savings and investment.
What Is Lump Sum?
This method involves making a one-time investment. Investors have to invest a significant amount all at once to buy units of mutual fund schemes. If an individual is investing his/her money via the lump sum method, he/she should put in their money when the Net Asset Value of a mutual fund scheme is low.
This will allow them to buy more units of the fund. It can be a suitable investment option for people having a large corpus.
Difference between SIP and Lump Sum
Here are some differences between the two investment methods:
| Parameter | SIP | Lump sum |
| Meaning | This method involves paying regular instalments at fixed intervals. One can make these payments at fixed intervals, for example, monthly, quarterly, etc., as per their convenience. | It involves making a one-time upfront payment. |
| Market monitoring | In the case of investments via lump sum, investors need not track market movements closely. These investments are made keeping in mind long term goals so investors can enter markets anytime. | Investors need to monitor markets closely as they can invest in different market cycles. Therefore, they need to keep a tab on markets and make their move when markets are favourable. |
| Minimum investment | The minimum investment amount in SIP is quite low. One can start their investment with as low as Rs. 500 per month. | However, lump sum investments require a higher investment amount than the SIP method. Many fund houses set a minimum investment amount of Rs. 5,000. |
| Rupee cost | Rupee cost averaging ensures that investors buy more units when the markets are low and fewer units when the markets are high. This reduces the average cost of investment. | Unlike SIPs, lump sum investments do not offer the benefit of rupee cost averaging. |
| Financial Discipline | It inculcates financial discipline in the investor. Regular investment moulds them into habitual savers and investors. Therefore, it will help individuals accumulate over a long duration. | In the lump sum investment method, one does not get into a regular savings habit as allocate the entire amount available with them all at once. |
| Flexibility | SIPs are very flexible and provide various options to investors. An individual can start and pause a SIP as per their needs. | In the lump sum method of investing in mutual funds, one does not get the luxury of pausing or restarting their investments. |
SIP vs Lump Sum — Which One Is Better?
Both SIP and lump sum are different ways of investing in a mutual fund. Each of these has a different target audience depending on the investment goal, horizon and corpus. Usually, lump sum investments are preferred by seasoned investors while SIPs could be a good option for those who are just starting out in their investment journey.
However, SIPs hold the benefit of rupee cost averaging. Meaning, you invest a fixed amount of money at regular intervals irrespective of whether the markets are going high or low. This ensures that you buy more units when the markets are low and lesser units when they are high. Also, for SIPs, you can start with as low as Rs.500, thereby minimising the risk.
However, if an individual has knowledge about the functioning of the markets and can track market movements, then lump sum can be a suitable investment route.
Benefits of Investing through SIP
Here are some benefits of investing via SIP:
- Rupee cost averaging
The most significant benefit of making an investment via SIP is that one can take advantage of rupee cost averaging. SIP instalments are spread out over a number of months. Fund managers can purchase more units of a mutual fund when markets are low and vice versa. This process lowers the per-unit cost of purchasing mutual fund units.
- Inculcates financial discipline
SIP inculcates a sense of financial discipline in investors. They become habitual savers and investors.
- Flexible
Individuals can stop or pause a SIP according to their convenience. This flexibility comes in very handy when one faces a financial crunch.
Also Read: SIP Calculator: Calculate Mutual Fund Returns With SIP Calculator Online
Benefits of Lump Sum Investment
Lump sum investments come with the following benefits:
- No chance of missing payments
Individuals having a large corpus for investment can go for lump sum investment method. They can invest the entire amount at one go. It reduces the chances of missing out on monthly payments.
- Long term investment
The lump sum investment method is most suitable for long term investment. It will allow individuals to park their funds for a longer duration and achieve their goal of capital appreciation.
Also Read: Top Mutual Funds For Lump Sum Investments: Features, Benefits And Important Things To Consider
Final Word
Both SIP and lump sum are investment modes that allow individuals to buy mutual fund units. That said, before investing their money, they must make sure to go through the above guide on SIP vs lump sum to analyse the pros and cons of both.
In case you’re planning to invest via SIPs in low-cost index funds, try Navi Mutual Fund. The benefits of investing with Navi Mutual Fund are many – low expense ratio, opportunity to invest in foreign markets through fund of fund, and more!
FAQs on SIPs Vs Lump sum
Ans: One of the biggest drawbacks of making an investment through SIP is that an investor can make an investment in fixed amounts only. Therefore, it is not suitable for individuals having a large investment corpus.
Ans: One can invest in ELSS via SIP and lump sum methods. Investors are eligible to claim deductions worth Rs. 1.5 lakh under Section 80C of the Income Tax Act. Investing in ELSS is an integral part of tax planning for mutual fund investors.
Ans: One can start investing through a SIP by opting for a mutual fund scheme that is offered by the Asset Management Company (AMC). Alternatively, they can invest via brokers or distributors, for which they’ll have to pay a higher expense ratio.
Ans: Yes, many fund houses provide options to investors to invest their money through SIP and lump sum simultaneously. For example, individuals can start investing via SIP for Rs. 1,000 per month and at the same time make a lump sum investment in the same mutual fund.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
