How is SIP different from lumpsum investment in mutual funds? (2024)

FAQs

How is SIP different from lumpsum investment in mutual funds? ›

SIPs allow you to pump in money into a mutual fund scheme periodically, such as daily, weekly, monthly, quarterly or half-yearly etc. On the other hand, lump-sum investments are a one-time bulk investment in a particular scheme. The minimum investment amount also varies.

The main difference between SIP and lump sum mutual fund is the cash flows. One invests only once in a lump sum investment and in SIP he/she invests regularly. There is no rule that a person investing through SIP can't do a lump sum when there are surplus funds available.

You can invest maximum Rs 150,000 in a financial year to avail the tax benefit. You can invest in mutual funds either in lump sum or through SIP. Lump sum is one time investment while SIP is staggered investment wherein you can invest a fixed amount in certain interval over a chosen period of time.

Mutual Fund investments can be made in two different ways – one is through SIP and the other is one-time investment. Systematic Investment Plan or SIP is a regular investment of small amounts for the extended time period. Whereas, in one-time investment, the investor parks a lump sum amount for the specific time.

A mutual funds SIP is managed by a professional fund manager, while in the case of stock SIP an investor needs to manage stocks on their own. A complex task for an investor could be in selecting and zeroing in on stocks to invest in. Stock SIPs give the option of buying a specific stock at different price points.

A lump sum investment in mutual funds are profitable when equity markets are in the process of rising higher. This would create aggressive returns for the investment made. However, when the stock market has high volatility, an SIP is the safest option due to Rupee-Cost Averaging and Compounding.

Studies have shown that SIP frequency, be it daily, weekly or monthly, has no major impact on returns. For instance, the difference in return between daily, weekly or monthly SIPs is negligible over time. However, you could struggle to monitor your investment if you opt for the daily SIP over the monthly SIP.

Diversification – By going for daily SIPs, you can diversify the investment. However, you should not over-diversify your financial portfolio. As the purchase price is averaged, the returns will average out as well. However, if a fund is not very volatile, the returns of monthly SIPs will be higher than daily SIPs.

As you saw, investing once a month gets you all the goodies. Plus, most people have a monthly income cycle, so monthly SIPs perfectly gel with that frequency. So, by all means, you can go for monthly SIPs, as the above data shows that daily or weekly SIPs don't enhance your returns significantly.

Can I invest lumpsum in mutual fund every month? ›

For a novice investor, investing in mutual funds can be a significant financial decision. Then comes the question of how to invest the money. Investments in mutual funds can be made in two ways: either through a lumpsum amount at once or periodically every week, month or quarter.

Yes, it is a good idea to invest lumpsum in mutual funds. Moreover, whether you should invest or not depends on the availability of funds and the future needs of those funds.

You will not incur income tax on SIP returns if they are below ₹1 lakh for a financial year. This rule will apply to long-term and short-term capital gains from equity-based mutual funds.

SIP is one of the best forms of disciplined investment, which should be done consistently over a period of time. An investor may diversify their portfolio by starting a SIP in two or more funds. Investments in certain funds are eligible for deduction from taxable income under Section 80C of the Income Tax Act.

You can take out money from a Systematic Investment Plan (SIP) before it's due, but the amount and process depend on the mutual fund's type, investment duration, and the terms of the fund house. Most funds have a minimum lock-in period, and breaking it might result in penalties.

SIP can protect your investment from any potential market crash. One-time investment is not cushioned against market volatility. As such, this investment could be a major loss, if the market crashes. This is a simple plan, and you do not require to have a thorough knowledge of the market.

Which SIP is best for 1 year? ›

Are SIPs Safe? A systematic investment plan (SIP) is a highly safe way to invest in mutual funds. If you make a lump sum investment in a mutual fund, depending on market conditions, you might wind up paying a very high price for a mutual fund. To avoid this, invest in the best SIP when markets are not overpriced.

To create wealth through SIP investments, tenure of a minimum of 5 years is recommended by a majority of experts.

Can I convert lump sum to SIP? A lump sum investment can be easily converted into an SIP. This can be done through the platform you are using to invest. You need to set up an SIP through that platform and start investing at periodic intervals.

SIP is an excellent long-term investment option for equity investors who want to build up a sizable corpus. SIP investments are proven to generate higher returns than traditional investments like gold, fixed deposit, PPF etc.

There is no specific date of the month that gives better SIP returns. So, your own convenience should be the only determining criterion. For example, if you are a salaried person and receive your monthly pay at the end of the month, then you can plan your SIP in the first week of the following month.

Most mutual fund investors choose their SIP date at the beginning of the month. They believe that allocating the money as soon as the salary is credited in their bank account makes perfect financial sense.

A general rule of thumb is to invest 10-15% of your monthly income in SIP. Risk tolerance: The amount you invest in SIP also depends on your risk tolerance.

According to Post Office RD Calculator, if you invest Rs 5,000 per month for five years the total return on your investment will be Rs 48,740 (with monthly compounding frequency). So the total amount that you will get after five years would be Rs 3,48,740.

Calculation of SIP returns

A monthly investment of Rs 5,000 for 10 years at an expected rate of return of 12 per cent will earn you Rs 11.61 lakh. The gains made by you in this scenario will be approximately Rs 5.61 lakh (Rs 11.61 lakh minus 5000*10*12).

What if I invest $1,000 a month in SIP? ›

By investing ₹1,000 per month via SIPs in this fund, you may be able to benefit from the fund's long-term capital appreciation goals and diversification across market capitalisations. Since its inception, it has delivered 12.43% in CAGR, which is much higher than the 6.32% delivered by its benchmark, S&P BSE Sensex.

In most cases, the lump-sum option is clearly the way to go. The main difference between a lump-sum and a monthly payment is that with a lump-sum option, you get to have control over how your money is invested and what happens to it once you're gone. If that's the case, then the lump-sum option is your best bet.

"But given the cost of holding cash for extended periods, most investors—particularly those who don't have significant aversion to loss—should invest a lump sum immediately."

Lump-sum investing outperforms dollar cost averaging almost 75% of the time, according to data from Northwestern Mutual, regardless of asset allocation. If you're comfortable with risk, then investing your money in one large sum could yield better results.

The obvious downside to lump sum investment is that you are putting all your money at risk, so you need to choose your investment portfolio very wisely and, just as importantly, hold your nerve at crucial times. A lot of this comes down to personality as well as financial circ*mstances.

A lump-sum investment is made at a point in time. The price you pay for the investment(s) may be high or low. If you invest when prices are high, you run the risk of incurring a loss if you need to sell in the near term.

There are two ways to invest in Equity Linked Savings Schemes (ELSS) – through SIP or lump sum. To withdraw ELSS lump sum after the mandatory lock-in period of three years gets over, one can raise redemption request through online or by visiting the respective mutual fund branch.

If an investor invested Rs. 10,000 as SIP for a decade, the total return would be Rs. 21.66 lacs. This mutual fund has provided around 25.5% annual return in the past two years, and its absolute return has been 57.6%.

When you invest in a fund (either via lump sum or SIP), you get a folio number, which is similar to your bank account and bank account number. Just like you can add money to your bank account either in five regular transactions or in one transaction, you can add investment amount to your existing mutual fund.

Can I show my SIP in income tax? ›

SIP Tax Benefit

SIP under Equity Linked Saving Schemes (ELSS) comes under the EEE (Exempt, Exempt, Exempt) category. This means, the amount invested, the amount on maturity and the withdrawal amount all are tax-free. With SIP in ELSS fund, one can claim a deduction of up to Rs. 1,50,000 per year.

As per the provisions of Section 80C of Income Tax Act (ITA), you can claim a tax deduction of maximum ₹1,50,000 on the total taxable income if you invest in one of the best tax saving SIPs in 2023. What's more, you can even save up to ₹46,800 in a financial year.

There are around 5 primary types of SIPs that you can invest in - regular SIP, flexible SIP, top-up SIP, trigger SIP, and perpetual SIP.

investing in Mutual Funds via SIP (Systematic Investment plan) involves Market linked risks, that are certainly higher for Equity Funds than debt and balanced Mutual Funds. The risk in SIP depends on the investment option that is chosen considering the risk profile, risk appetite and liquidity.

If the SIP was maintained, this would be the case. With a monthly investment of ₹40,000 in a mutual fund plan, the sum would reach ₹1 crore after 10 years and 6 months. According to the findings of Value Research, large-cap funds achieved an average return on investment of 13.36% during ten years.

Therefore, it is typically better to start SIP when markets and prices are weak. But again, stopping your SIP now is not a wise move. Averaging the high cost of SIPs acquired in the past or purchased in the future, you will receive more units for your investment.

Yes. In fact, it is better to invest in SIP for the long term. Instead of waiting and accumulating money to invest, you start investing whatever amount you are able to save. This way, your money is always invested.

Disadvantages of Lumpsum Investing in Mutual Fund

Investing lump sum does not bring an investment discipline to an investor. Once an amount is invested, the investor might settle down even if there is a scope for saving some funds and sparing it for a regular investment.

Can SIP be converted to lump sum? ›

Once you select the fund, you will see options such as 'Start SIP' or 'One Time' or both. To make a one-time lump sum investment, click on the 'One Time' option. Here, you need to enter the amount that you wish to invest in that particular fund.

Lump-sum investments are most beneficial when you invest during a market low. However, with SIPs, you have the chance to enter during different market cycles. Investors do not have to watch market movements as closely as they would for lump-sum investments.

You Get Better Control Over Your Investments With Lumpsum Investing. Lumpsum Investing Gives You The Benefits Of Power Of Compounding. Lumpsum Investing Gives You The Power To Benefit From Market Corrections. Lumpsum Investing Gives You Better Returns In A Bull Market.

Investors can avoid taxes on a lump sum pension payout by rolling over the proceeds into an individual retirement account (IRA) or other eligible retirement accounts.

Transfer or Rollover Options

You may be able to defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan.

Lump-sum distributions can kick you up into a higher tax bracket. For example, if in retirement you have $9,000 per year in taxable income, you'd likely be in the 10% tax bracket in 2022. But if you take out a $200,000 lump-sum withdrawal, you'd probably find yourself in the 32% bracket.

Saving with a savings account

If your lump sum is a smaller amount or you would prefer to save your money towards certain priorities, a simple savings account might be the better option for you. Cash savings are always popular with people who want to put away a lump sum and earn interest over a long period of time.

A lump sum investment is generally considered when the investor has a big corpus to invest. This could be money received after retirement, from the sale of a house, from an inheritance or it might just be the case that you have accumulated money in your bank account and wish to invest it now.

What happens to SIP on maturity? ›

To maintain continuity, you can choose to renew the SIP of your MF plans at the end of the period. The AMC often sends you a reminder to renew your SIPs. Based on the scheme's returns during the course of the SIP period, you can decide whether or not to renew your SIP.