brand-logo-of-daulat

SIP vs Lumpsum – Which Is Better?

Harsh Jain
September 27, 2022
SIP VS Lumpsum
Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

SIPs or Lumpsum? This is the million-dollar question that everyone needs to answer when they are investing. While there is no right/wrong answer, each of the styles of investing is suited for different needs and personalities. 

In this post, we have made it that much easier for you to understand the differences between the two so that you can make a more informed decision for yourself. Let’s quickly recap what each of those terms first means: 

What is a SIP

A Systematic Investment Plan or a SIP is an investment strategy where you invest a fixed (or progressively increasing) amount in regular intervals (either weekly, monthly, or quarterly). The biggest benefit of SIP is that seemingly small sums of money set apart every month can compound very rapidly over long periods. 

That is the reason SIPs are the most chosen path when investing in Mutual funds. Also, the easiest to start considering the minimum amount of investment (SIP) can go as low as Rs.100 a month.

Please note that SIP is not a mutual fund scheme. It is merely an approach to investing in mutual funds. And all mutual fund schemes allow you to invest in them via the SIP route. 

What is Lumpsum

Lumpsum investing, as the name suggests, involves investing your capital in one go, usually, a larger amount instead of breaking down your investments into smaller chunks like SIPs. This form of investing is useful to people who have irregular cash flows or often would like to take advantage of a temporary dip in the market from time to time. 

SIP v/s Lumpsum – Showdown

We try to define what’s good for what variable to better understand which mode of investment is the best fit for you. 

Capital Size

Small: When you don’t have a sizable amount to invest, a Systematic Investment Plan is the sure-shot way to go forward with, considering you can start with a very small amount. Waiting to accumulate a large capital and then going lump sum can be a risky affair and instead of waiting for a chance to join the race, you can start running slowly and eventually but surely reach the finish line. 

Also, SIPs add discipline to your investment routine, and with systematic investing, you don’t go overboard in spending your corpus and see your investments grow hand-in-hand.

In Mutual Funds, starting with a low monthly SIP plan can give you first-hand experience investing in the markets without committing vast amounts of money. 

Medium: If you have a decent amount to start investing, it is important to strike an optimum balance between Lumpsum and SIP investment. This gives you good of both and helps you stay on top of the market by mitigating the risk with lump sum helping in speeding up the compounding process and SIPs diluting the volatility and averaging the rupee cost over the period.

Large: When you are dealing with a large corpus, you may want to invest the amount in a single installment rather than spreading it out through SIPs. However, this can often turn out to be risky and you have invested in a falling market. Rather, you can invest the lump sum in a debt fund and opt for a Systematic Transfer Plan (STP) wherein every month (or whatever frequency you like) – you will be able to transfer the money from the debt fund to an equity fund of your liking. In this manner, you can spread out your investments over a while even if you have a lump sum to invest. 

Risk Appetite

Conservative/Balanced:  If you want to play it relatively safe in your investing journey, it is best to invest via SIP. Also, SIPs reduce the average cost of acquisition over time due to a process called Rupee Cost Averaging whereby you buy more units when markets are down and vice versa.

Aggressive: If you are ready to take on a bit more risk and are comfortable with the ups-and-downs of the market, you should opt for Lumpsum investments. 

Volatility

High: If the markets are extremely volatile, it can become difficult to see a consistent drop in your portfolio value. Therefore, in such situations, it is usually advisable to stick with SIPs and continue investing in spreading out your risk over long periods. 

Low: With the markets looking seemingly safe (you can never be sure of it), you can consider putting in lumpsum investments from time to time to take advantage of that. However, it is often very difficult to accurately predict when the tide would turn. 

Conclusion

Having said everything, SIPs are growing hugely popular for all the right reasons as more and more investors step into the market.

A thorough revision of your corpus to invest, risk appetite, and especially age can give you the final answer to how your investments should be divided into SIPs and lump sums.

Risk Assessment Test