Some questions never die. They keep haunting us from time to time. One such everlasting matter is SIP vs lumpsum. Which approach is better – SIP or lumpsum? Which investment mode has the potential to generate higher returns in the future? This article will focus on these 2 modes of investment and help you decide the best mode of investment for your mutual fund investments.
Mutual funds offer exceptional flexibility to individuals in terms of several asset classes and modes of investment. That being said, the former isn’t that perplexing if you carefully evaluate your financial goals. However, a slight overlooked yet equally significant aspect of mutual funds is choosing the appropriate mode of investment. There are 2diverse ways to invest in mutual funds – SIP and Lumpsum.
What is SIP?
Systematic Investment Plan (SIP) is a means to invest in mutual funds. Under the SIP mode, an investor invests a fixed amount of money at regular intervals in their desired mutual funds. Under this disciplined form of investing, regular, automatic investments are made against a particular scheme.Also, one should not invest in SIP if they have uncertain future earnings or income. You can use an SIP return calculator to estimate the future value of your investments.
What is Lumpsum?
Under the lumpsum mode of investment, you invest the entire amount in one go. This method is often chosen to build superfluousliquidity and wealth. Unlike SIP investment, this method demandstiming of the market. This mode of investment is usually recommended when the markets are constantly growing.
Let’s understand these concepts with the help of an example. Imagine there are 2 diverse cricket teams – Team X and Team Y, playing a one-day match. Team X has batsmen who prefer to accumulate runs gradually in singles and twos. At the same time, Team Y’s playertries to score the maximum runs quickly. Team A’s or accumulator’s approach would be less risky and he would often make a reasonable total, even on a bad pitch.On the other hand, Team B’sor attacker’s strategy could be considered highly risky. On a good wicket, they could easily outscore their opponents. But on a bad day, they might collapse and lose the plot.
In the investment world, the accumulator’s or Team A’s approach is akin to an SIP investment. In contrast, Team B’s strategy is similar to lumpsum investment.
Difference between SIP and Lumpsum mode of investment
|Time of investment||Subject to your investment goals and market volatility||Subject to your investment goals but somewhat immune to market conditions|
|Uncertain future income||Relatively recommended||Not recommended|
|Cost of investment||High (requires a significant one-time investment)||Less (thanks to rupee cost averaging)|
|Flexibility of investment||Low||High|
What should you choose – Lumpsum or SIP?
Whether you opt for SIP or lumpsum, entirely depends on whether you have regular savings or lumpsum amount of liquid money to invest. SIP or lumpsum mode of investments solely depends on an individual’s personal goals, risk appetite and investment horizon. Whichever mode you decide to choose, make sure to run it through with your fund advisor. Happy investing!