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SIP vs LUMPSUM Investments

Writer's picture: AssetPlusAssetPlus

Updated: Nov 21, 2024

Introduction:

You might visit a financial expert or even discuss investing in mutual funds with your friends, colleagues, or family. The first question might be, “Do you want to invest regularly through SIP or make a one-time Lumpsum payment?”


This question requires thought to answer, especially for a beginner. You must be familiar with both investment methods, compare differences, and decide on the most suitable alternative to build wealth. This blog will help you understand the key differences between SIP vs. Lumpsum investments in mutual funds with an easy-to-remember comparison table, past performance proof, and effective illustrations.


Let’s first grasp the nuances of each investment alternative one by one and then complete your understanding with a comparison table. This will help you speed up your decision-making.



SIP Investments


What is SIP and How Does it Work?

A Systematic Investment Plan (SIP) is an investment method in which you can invest a specific amount of money in a mutual fund scheme at regular intervals, such as weekly, monthly, or quarterly. You can purchase multiple units of the mutual fund scheme through a SIP on a specified date for each period. This systematic approach helps average the cost of investment and reduces the impact of market fluctuations.


Types of SIPs
  • Flexible SIP: Allows investors to increase or decrease the investment amount according to their financial situation.

  • Top-Up SIP: Enables investors to increase their SIP amount periodically to align with income growth and financial goals.

  • Perpetual SIP: Continues indefinitely until the investor chooses to stop it.

  • Trigger SIP: A trigger SIP is executed by an investor based on specific market conditions or pre-defined triggers.


Advantages of SIP investments

  1. Convenience: The automated and periodic nature of SIPs makes them convenient for investors.

  2. Low Initial Investment: SIPs can be started with a minimal amount, making them accessible to all investors.

  3. Disciplined Investments: SIPs instil a habit of regular savings and investing.

  4. Long-Term Wealth Building: SIPs help generate significant returns over time through the power of compounding.


Points to Keep in Mind
  • Investment Goals: Clearly define your financial goals, whether short-term, medium-term, or long-term.

  • Risk Tolerance: Assess your risk appetite and choose a mutual fund scheme that aligns with it.

  • Investment Horizon: It's crucial to determine the duration for which you intend to invest, to ensure it aligns with your financial goals. This alignment will provide you with a sense of security and control over your investments.

  • Fund Performance: It is wise to research the historical performance of the mutual fund scheme, including its returns, fund manager's track record, and expense ratio.

  • Market Conditions: While SIPs mitigate market volatility, staying informed about overall market conditions and economic trends is still crucial.



Lumpsum Investments


Understanding Lumpsum Investments

Lumpsum investment is a method of investing a bulk amount in a single-shot or one-time payment. Fixed deposits and annual Insurance premium payments are common examples of lumpsum payments. In mutual funds, if you cannot make a monthly commitment or have a surplus amount that you want to save, you can choose the Lumpsum investment method.   


Benefits of Lumpsum Investments
  • Convenience: Lumpsum investments in mutual funds offer convenience in that you don’t need to make a regular or monthly commitment, like in the case of SIPs. You can invest when you have a surplus of money and find favourable market conditions.

  • Capital appreciation: When you make a Lumpsum payment and stay invested in the long term, you can witness capital appreciation significantly. Lumpsum investments also afford the time to go through and adjust to market fluctuations, thereby growing your wealth in the long run.

  • Ideal for all types of goals: Lumpsum investments are suitable for all types of goals, whether short-term, medium-term, or long-term. By investing a bulk amount in a single shot, you can focus on your goals and accumulate the desired wealth.

  • High growth potential: Lumpsum mutual fund investments help generate better returns in the long run, thus offering higher growth potential for your investments.


Points to remember
  • Patience: Patience is a crucial parameter when it comes to Lumpsum investments. Unlike SIPs, Lumpsum investments have a lower risk tolerance and are more susceptible to market falls and volatility. Hence, one must exercise caution, patience, and calm when building wealth through lumpsum investments in mutual funds.

  • Market evaluation: It is wise to examine the past performance of schemes and companies to get an idea of how your lumpsum investments might perform. Past performance should not be taken as a baseline but rather considered only as a reference. 

  • Potential returns: Any investment’s prime objective is to generate returns. Hence, looking at returns and comparing them to benchmark performance can help you understand how your Lumpsum will perform in the future. The CAGR and XIRR of schemes can help in your decision-making.

  • Liquidity expectations: Your investments should be able to beat inflation and bank returns and also conveniently meet your liquidity requirements. If the fund doesn’t satisfy these criteria, it implies a switch to a better scheme.



SIP vs. LUMPSUM CALCULATOR


SIP Calculator

A SIP calculator is an effective online tool that helps you efficiently plan your SIP investments in mutual funds. It employs the concept of the power of compounding to compute the future value of an SIP investment. The SIP calculator online uses three primary input parameters: Monthly investment amount, Expected rate of annual return, and Investment duration.


The formula behind the working of an online SIP Calculator is 

fv = p × ({[1 + r]n – 1} / r) × (1 + r)

where, 

  • fv = future value earned upon maturity

  • p = fixed investment through sip

  • r = compounded interest rate

  • n = investment duration


Lumpsum Calculator

A Lumpsum calculator helps you determine the returns you might generate if you invest a large amount of money all at once. It requires the following inputs to calculate your future investment returns:

  • The amount of money you plan to invest

  • The investment tenure, in other words, the period of holding

  • The expected rate of return on your investments


The formula to calculate lumpsum returns is:

A = P (1 + r/n )  ^ nt

Where,

  • A = Amount of Return on the Lumpsum investment

  • P = Present Value of investment

  • r = Rate of return

  • n = Number of times an interest gets compounded in a year

  • t  = Tenure of investment  



FACTORS TO CONSIDER WHILE DECIDING BETWEEN SIP OR LUMPSUM INVESTMENTS 

Frequency of Income
  • If you are running a business, a freelancer, or have a career that offers infrequent cash flow, you could choose a lumpsum investment. On the other hand, a salaried employee trying to inculcate a savings habit can go for SIPs. Investors with irregular cash flows who still want to take advantage of rupee cost averaging can opt for STPs (Systematic Transfer Plan).

Rupee Cost - Averaging:
  • In this approach, we invest a fixed amount of money at regular intervals regardless of the market conditions, which ensures that we buy more units when the markets are low and fewer units when the markets are high.

Systematic Transfer Plan:
  • STPs allow you to periodically switch/transfer a fixed amount of money from one mutual fund scheme to another at pre-defined intervals.

Market Timing:
  • A lump sum investment might generate higher returns during bearish (low-market value) times. However, if we are unable to identify and time market cycles, SIPs would help us distribute risks.

Risk Tolerance:
  • While SIPs have the tendency to be more risk tolerant, Lumpsums on the other hand seem to be susceptible to market fluctuations. This is because in SIPs, the investment is made on a regular basis with smaller amounts aiming to take better advantag of all market conditions and cycles. Whereas lumpsum investments are bulk payments and the entire amount gets impact as per the market performance.

Financial Goals:
  • Both SIPs and Lumpsums help in generating wealth in the long term and are ideal for long-term goals. However Lumpsums have a better play in the medium term and short term.

Expert Guidance:
  • Be it SIPs or Lumpsums, or choosing the mutual fund scheme, it is best to approach a financial expert who has a better understanding of the markets and investments and also has the ability to understand your individual goals, affordability and risk tolerance.



WHEN TO CHOOSE SIP OR LUMP SUM FOR MUTUAL FUNDS

This complete 20-point comparison table will help you understand the differences between SIP and lump sum investments in Mutual Funds and decide on the most suitable alternative.

S. No

COMPARISON

SIP Investments

LUMPSUM Investments

1

MEANING

SIP is an investment strategy wherein a specific sum of money is invested in a mutual fund scheme at regular intervals, such as weekly, monthly, or quarterly

Lumpsum, as the name suggests, is a method where investors invest a lump of money (according to their ability) in a single instalment

2

INVESTMENT AMOUNT

You can start a SIP with a minimum amount of Rs. 500

You can start a lumpsum investment as low as Rs. 1000

3

MARKET CONDITIONS

Helps average market fluctuations through rupee cost averaging

Subject to market fluctuations as the entire amount is invested in one shot

4

MARKET TIMING

SIPs help you to take benefit of different market cycles thus you can enter whenever it is possible and stay invested

It is ideal to see how the market is currently performing and anticipate future performance through an expert’s help

5

COST AVERAGING

Employs rupee cost averaging (buy many units at lower NAV during correction and fewer units at higher NAV during rally)

Does not employ rupee cost-averaging

6

POWER OF COMPOUNDING

If you choose to reinvest the returns earned, they will help boost the compounding power of your investments, including the principal investments

Compounding helps multiply the reinvested returns although the principal amount grows at independently

7

TIME HORIZON

Long-term investment objective

Short-term investment objective

8

RISK TOLERANCE

Lower risk 

Comparatively higher risk

9

REACTION TO MARKET VOLATILITY

Controls the impact of market volatility on investment performance

More susceptible to volatility

10

RETURNS

Helps earn moderate to high returns in the long-term

Helps earn moderate to high returns in the short-term

11

CASH FLOW

A regular and systematic flow of investments at pre-determined dates

A single-time bulk payment

12

FLEXIBILITY

It is more flexible as we can modify the frequency and investment amount 

It is less flexible as it is just a one-time payment

13

FINANCIAL DISCIPLINE

Instils a financial discipline and savings habit as investments are made regularly

Does not influence financial and savings habits

14

INVESTMENT GOALS

Suitable for long-term goals and creating wealth

Suitable to meet short & medium term goals

15

BEST SUITED FOR

  • Investors with regular and fixed income sources (salaried people)

  • People with limited disposal of funds

  • First-time investors

  • People who have a bulk amount of money and want to multiply it

  • Random single-shot bulk payments

16

SUITABLE FUNDS



17

INVESTMENT MONITORING

Investments can be reviewed  once every 2 to 3 years

It is ideal to review investments annually

18

HOW TO OPTIMISE

It is wise to top-up your investments regularly to boost wealth-building through SIPs

Choose an STP (Systematic Transfer Plan) to transfer your Lumpsum to an SIP and effectively leverage risk and return on your investments.

19

BENEFITS

  • Convenience

  • Disciplined investments

  • Affordable commitment

  • Long-term wealth creation

  • Higher growth potential in the short-term

  • No continuous commitment

  • Ability to invest in one-shot

  • Appreciation of capital

20

CALCULATOR FORMULA

fv = p × ({[1 + r]n – 1} / r) × (1 + r)

where, 

  • fv = future value earned upon maturity

  • p = fixed investment through sip

  • r = compounded interest rate

  • n = investment duration

A = P (1 + r/n )  ^ nt


Where,

A = Amount of Return on the Lumpsum investment

P = Present Value of investment

r = Rate of return

n = Number of times an interest gets compounded in a year

t  = Tenure of investment 



CONCLUSION: WHICH IS BETTER - SIP or LUMPSUM?

It is evident that SIPs have outperformed Lumpsums in terms of returns in different time horizons, proving to be a feasible and high-return generating investment option due to the cost averaging benefit despite the minimal capital invested initially. So, when one is not sure between going for a SIP or lumpsum, SIPs would be a prudent choice as it seems to have sustained even during bearish market times.


However, we are not suggesting one shouldn't opt for Lumpsum if they are looking for better returns. But market timing plays a pivotal role in Lumpsums. If Lumpsums cannot be timed perfectly, one might not accrue huge returns or might even suffer a loss. In that case, we would suggest opting for STPs into desired funds instead of direct one-time lumpsums to avail of the benefits of rupee cost averaging.


Ready to Start Your Investment Journey? Calculate Your Returns Now with Our SIP Calculator  and Lumpsum Calculator !”  Just visit our Best Platform for MFDs in India  or Whatsup us or Call @ +917200286952


FREQUENTLY ASKED QUESTIONS

Which method is more suitable for beginners: SIP or lumpsum?

SIP is generally recommended for beginners as it instills a habit of regular investing, requires a low initial commitment, and reduces the need to time the market.

What is the difference between SIP and lumpsum investments in mutual funds?

Which is better: SIP or lumpsum investment?

What are the key advantages of SIP investments?

When should I consider lumpsum investment?

Can I switch from lumpsum to SIP or vice versa?

What are the risks associated with lumpsum investments?

How does the power of compounding work in SIP vs lumpsum?

Which type of mutual fund is best for SIP and lumpsum investments?

Which investment option helps better during a market correction: SIP or lumpsum?












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