SIP vs lump sum: Which option should you choose?

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Should you invest in mutual funds via SIP or a lump sum? This is one of the most common questions every investor asks. Money9 delves into the issue and explains you the difference:

Understanding SIP vs Lumpsum

The primary difference between SIP and lumpsum methods is the frequency of investments. SIPs allow you to invest in a mutual fund scheme periodically — daily, weekly, monthly, quarterly, or half-yearly, etc. On the other hand, lump-sum is one- time large investment in a particular scheme. The minimum investment amount also varies. You can begin investing in SIPs with as little as Rs 500 per month while generally lump-sum investments need at least Rs 1,000.

Which is better?

Before deciding which investment method is better, one needs to review his income flow. If an investor has a regular income and is able to save some money, he can choose to invest via SIP. However, if the income flow is irregular and the investor can spare a large sum of money, he can go for lumpsum investment. Salaried class usually prefers SIPs to invest in mutual funds.

In SIP, you buy more when the market is low down, and buy less when the market is up. And, as a result, you get a weighted average return over time.

The lump-sum investment gives better returns as compared to SIP, if the market grows continuously. However, in a volatile market SIP is the better option.

How it works

Pramod and Vinod want invest in mutual funds. Both have a time horizon of 5 years. Pramod has Rs 60,000 in hand but Vinod doesn’t have a lump sum amount. So, Pramod chose to invest the entire amount together in lumpsum and Vinod starts a SIP for the same duration with Rs. 1000 every month SIP.

Both of them had invested in equity mutual fund which delivers 12% returns per year. The expected return of Pramod would be Rs 1,05,740 after five years. While Vinod’s SIP of Rs. 1,000/month in the same scheme with the same returns for five years would get him a total of Rs 82,486 at the end of 5 years.

Conclusion:

SIP and lump sum investment both have their own benefits. The selection depends upon what suits you better. While SIPs are more pocket-friendly and more comfortable to begin, the lumpsum investment can generate higher returns, especially in a bull market. But do note that making the best use of lumpsum investment requires significant knowledge and experience.

If you are new to mutual funds and planning to invest in something like an equity scheme, SIP might be a better option.  And, if you can spare a large amount and have a higher risk tolerance, lump-sum investments may be more beneficial.