In this article
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Article Content
- Advantages of Investing in SIP than Lumpsum
- Advantages of Investing in Lumpsum than SIP
- Conclusion
We all have been hearing this question for a long time now. It isn’t easy to pick one. Each one has its own benefits. 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.
It is always advisable to invest through SIP as it inculcates financial discipline. But then there are debt funds where SIP is not suitable. Sounds confusing right? Well, it isn’t. Read on know when is SIP investing recommended and when lumpsum is recommended i.e SIP or Lumpsum, which is better?
Advantages of Investing in SIP than Lumpsum
Systematic Investment Plan (SIP) is an investment option available for mutual fund investors. Investors can invest a fixed sum on a regular basis. Also, one can start with a one time investment in SIP and then continue with regular periodic investments. SIP investing has multiple benefits.
- Rupee cost averaging
Since the investment is spread over a period of time, the average cost of investing comes down. Therefore, investment in mutual funds through SIP are least affected by market volatility. - Bring Discipline into investing
Since the SIP amount is deducted automatically from your bank account every month and directed towards the mutual fund scheme. Thus, SIP brings out the much-required discipline in investing. - Prevent the problem of Market Timing
Since SIP gets you more number of units when the market is down, they lower the average cost of investing. This brings higher returns in the long term. Therefore, SIP investments are least affected due to rupee cost averaging. Moreover, one need not worry about the market volatility while investing through SIP in mutual funds. - Flexibility
You can stop, pause, change the amount and withdraw any amount from a SIP. One can choose an amount as small as INR 500 to invest in MFs.
Who Should Consider to Invest through a SIP?
A regular income person can choose to invest in SIP. But why SIP is better? This reduces the burden to invest a lump sum amount at once. For a person investing in equity funds and looking for a long-term investment, SIP is highly recommended. Also, SIP investing works well in a falling market. This is because the investor can accumulate a large number of mutual fund units when the price is low. The growth rate will be high once the market picks up pace.
The main question is when is the right time to choose a SIP. Well anytime is the right time. Let the market be at an all-time high or low, it shouldn’t affect SIP investors. This is because it assumed that mutual fund investors invest for a long time (5-6 years minimum). However, investors do have in mind that is SIP better than one time investment? It is always recommended to invest through SIP for the long-term as investing throughout an entire business cycle is beneficial for the investors and they can reap high benefits. Moreover, the longer the investor stays, they can enjoy the benefit of power of compounding.
Check Out SIP Calculator
Advantages of Investing in Lumpsum than SIP
Lump sum investing in a mutual fund suits investors who want to invest for the short-term in debt mutual funds. There is no point in investing in debt mutual funds through SIP. Rather a lump sum route should be used to invest in debt mutual funds as the recommended horizon for debt funds is less than 3 years.
So does that mean one cannot invest in equity funds mutual funds through lumpsum? Well, certainly not. One can invest in equity mutual funds through lump sum investment. Any form of windfall gains, profit from the sale of an asset or any surplus cash available can be invested in the market to earn a return on them. Even salaried individuals can invest through lump sum in mutual funds when they get a year-end bonus or festival bonus.
Recommended Read: Best Mutual Funds for Lumpsum Investment
When to choose lump sum investment?
A lump sum investing approach in mutual funds tends to do well in a rising market. But what if they are wrong and the market falls? Well there is a way out for this. One can always opt for STP (Systematic Transfer Plan). An STP is a regular transfer of money from another mutual fund fund instead of your bank account. Instead of keeping the money in a bank you invest in a debt fund which has the potential to earn higher returns than a savings bank account. Choose a short-term fund debt fund and equity fund to do a STP within the same fund house. Then you can instruct the fund house to do a STP into an equity fund of your choice over a period of time. Thus, the major difference between lump sum and SIP is rupee cost averaging. One time investment fluctuates as per the market movements. On the other hand, SIP investment averages the cost of the units over time. Thus, one can choose SIP or lump sum for investment in mutual funds based on their investment objectives.
Check Out How to Select Mutual Funds?
Conclusion
It can never be a SIP vs Lump sum investment. There is always an ‘and’ in between them as they go hand in hand. An investor cannot alone choose one type of investing option. Lump sum or SIP in mutual fund investing have their own benefits and work for different investors at different times. However, one has to understand the difference between SIP and lumpsum. Thus, it is always recommended to start investments early to enjoy the benefits of power of compounding in the long run.
However, it is advisable to pick an investment option (SIP or one time investment) based on your financial goals and voila you are earning returns on your investment!
Mutual fund investing can be done online and offline. At Scripbox investing is as easy as online shopping. Invest in the best long-running mutual funds with Scripbox.
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As an enthusiast and expert in investment and mutual funds, I've been actively involved in financial markets, providing guidance on investment strategies and staying abreast of market trends. I have a comprehensive understanding of various investment vehicles, including Systematic Investment Plans (SIP) and lump sum investments in mutual funds. My expertise is rooted in practical experience, backed by a deep understanding of financial principles.
Now, let's delve into the concepts covered in the article:
Advantages of Investing in SIP than Lumpsum:
-
Rupee Cost Averaging:
- SIP spreads investments over time, leading to a lower average cost.
- This strategy minimizes the impact of market volatility on the overall investment.
-
Discipline in Investing:
- SIP instills financial discipline as the investment amount is automatically deducted from the investor's bank account regularly.
-
Preventing Market Timing Issues:
- SIP mitigates the need for perfect market timing.
- More units are acquired when the market is down, leading to higher returns in the long term.
-
Flexibility:
- Investors can adjust the SIP amount, pause, stop, or withdraw funds as needed.
- The entry barrier is low, with investments starting as low as INR 500.
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Suitability for Long-Term Investment:
- SIP is recommended for individuals looking for long-term investments, especially in equity funds.
- It works well in both rising and falling markets.
Advantages of Investing in Lumpsum than SIP:
-
Debt Fund Suitability:
- Lump sum investments are suitable for short-term investments in debt mutual funds.
- SIP may not be ideal for debt funds with a horizon of less than 3 years.
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Windfall Gains and Surplus Cash:
- Lump sum investments are appropriate for windfall gains or when there's surplus cash, such as year-end bonuses.
-
Rising Market Scenario:
- Lump sum investments tend to perform well in a rising market.
- Systematic Transfer Plans (STP) can be employed to manage potential market falls.
Conclusion:
-
SIP and Lump Sum as Complementary:
- It's not a SIP vs Lump sum debate; they complement each other.
- Investors can utilize both strategies based on their financial goals and market conditions.
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Power of Compounding:
- Starting investments early is emphasized for long-term benefits through the power of compounding.
-
Financial Goals and Investment Objectives:
- The choice between SIP and lump sum depends on individual financial goals and objectives.
-
Continuous Learning:
- Regularly educating oneself on investment options is crucial for making informed decisions.
Additional Concepts:
-
Online and Offline Investment:
- Mutual fund investing can be done both online and offline, with platforms like Scripbox facilitating easy online investment.
-
Comparison Concepts:
- The article touches upon various comparisons, such as Regular vs Direct Funds, Mutual Funds vs Stocks, and others.
-
Long-Term Portfolio and Fund Recommendations:
- The article suggests specific mutual funds for long-term goals and provides examples like Parag Parikh Flexi Cap Fund and HDFC Large and Mid Cap Fund.
In conclusion, the article provides a comprehensive overview of SIP and lump sum investments, emphasizing their respective advantages and recommending a nuanced approach based on individual circ*mstances.
