If you’re someone who wants to invest in mutual funds you might have a question in mind – SIP vs Lumpsum Investment – Which one is better? Read on!
It’s that time of the month when you receive your fruits of labor as an employee in your bank account. Or you probably have an intermittent cash flow from your business venture. Whatever the scenario, choosing the right kind of investment approach for your financial goals is essential to ensure greater returns.
SIP vs Lumpsum Investment, the main difference is how you invest your money. In the case of SIP, you invest a certain amount of money every month for a fixed period of time, whereas in the case of Lump sum investment, you make a one-time payment.
Both these methods can potentially generate high returns on your investment. But there are times when
SIP may give you greater returns than Lump sum investment or vice versa.
In this blog, I will simplify things for you and explain when to choose SIP and when to choose the Lump-sum investment approach
How Does SIP work?
SIP allows you to invest a small amount of money monthly, in a mutual fund scheme. It is a systematic way of allocating set sums of money regularly. For example, you can do this semi-annually, quarterly, or monthly.
It is a disciplined way to ensure greater returns on your investment at the end of your investment tenure.
You can get a rough estimate of your returns using a simple SIP calculator tool.
SIP – Pros And Cons
| Pros | Cons |
| Affordable | You can only invest a fixed amount |
| Flexible | You cannot skip a month |
| Ideal for new investors | Not suitable if you have inconsistent income |
Is SIP Safe?
SIP is a safe and secure way to invest your money.
How Does A Lump Sum Investment Work?
A lump sum investment is when you invest a large sum of money all at once for some time. Unlike SIP, you don’t invest your money in periodic installments.
If you have a sizable financial corpus to invest in, I recommend the lump sum investment approach, which can be thoughtfully adopted after carefully studying the market condition. It only makes sense to enter at a time the market is low.
Lump-Sum Investments – Pros And Cons
| Pros | Cons |
| You can gain better in a rising market. | You need to be an experienced investor who understands the market well. |
| Unlike SIP, You have the flexibility of investing only when the market is on your side (low), for you to have better chances of growing your money. | Lump-Sum is not a good option for short-term investment. |
| You can utilize the benefits of compounding better | Larger the sum you invest, the higher the risk of loss in case of a market fall. |
Best Mutual Funds For Lump Sum Investments
Now that you know how Lump Sum investment works, the next step is to know the best performing mutual funds for lumpsum investments.
The best mutual funds give higher and consistent returns on your investments. While choosing the best mutual funds, always consider your risk tolerance and financial goals to avail maximum benefits.
To start your lumpsum investment journey, check out these best mutual funds for lumpsum investments.
SIP Vs Lumpsum Investment – What is right for you?
The market will always remain volatile, period. When you choose the right investment plan, you have to use the market upheaval to your advantage and maximize your returns.
When To Choose SIP Over Lump Sum Investment?
If you want to reduce the risk due to market volatility, you should invest in SIP.
In the case of SIPs when the markets are low, you purchase more units at the same fixed investment amount, and when they are high, you buy fewer units. In the long run, this strategy lowers your average cost per unit.
Although the investment amount is fixed, you gain more units when the market declines, whereas fewer units are obtained when the market rises. As a result, when the market is high, new purchases are made at higher prices.
However, at the time of the market crash, this effect is negated. This works in your favor by lowering the cost of holding and increasing the return on investment. You can use a SIP calculator to get a rough estimate of the returns on your monthly SIP.
When To Choose Lump Sum Investment Over Sip?
A Lump Sum investment will only make sense if you invest your money during market lows. Lump-Sum investments, by nature, are very vulnerable to market timings. The lump-sum style of mutual fund investment generates significantly larger returns during rising trends.
Identifying a market bottom and investing a lump sum amount in a mutual fund at the right time can yield substantial returns for investors who understand market cycles. It is due to the age-old investment philosophy of purchasing low and selling high.
Conclusion
There can be no SIP Vs Lumpsum investment. It depends on your financial goals and your knowledge of the market. If you want to invest your money risk-free, you can start SIP anytime. If you’re someone who can get the market timing right and technical understanding right, a Lump-Sum investment will make sense.
It is important not to get swayed by your emotions and make hasty decisions when investing your money. If the market is at a peak, investing in Lump Sum will only result in a loss. However, a SIP will reap returns in all market conditions, in the long term.
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