SIP vs Lump Sum: Which one is better for investing?

21 August, 2024

Synopsis

• Systematic Investment Plan offers regular, fixed investments with flexibility, ease of market timing, and benefits from rupee cost averaging, making it ideal for long-term, passive investors.

• Lumpsum investments are best suited for scenarios with surplus cash, rising markets, or short-term horizons. They provide higher returns when large amounts are invested at once.

• SIPs reduce volatility impact and ensure disciplined investing, while lumpsum investments can yield higher returns in a rising market but require more monitoring and timing precision.

• Your decision between SIP and lumpsum should be based on your cash flow, time horizon, risk tolerance, and financial objectives. Both methods offer unique advantages depending on individual circumstances.
  
  

When you plan to buy a house, you generally have two options – pay for it in one go or through EMIs. The situation is somewhat similar in mutual funds – you can either take the SIP (like EMIs) route or the lumpsum (like one-time payment) route. Let’s examine which is better, SIP or Lumpsum. Before moving ahead, let us understand the basics of SIP and lump sum investments.

Understanding SIP & Lumpsum

SIP or Systematic Investment Plan: Here, you can invest a fixed/small amount of money on a fixed date at regular intervals. This interval can be daily, weekly, fortnightly, monthly, or quarterly. The minimum investment in a SIP is ₹500, though some mutual fund houses also allow you to start an SIP with just ₹100. Here, you become the owner of the mutual fund units on your chosen SIP date.

Lumpsum: Here, you make your entire investment once. The minimum amount is ₹100, and you immediately become the owner of the mutual fund units. Remember, you can start with SIP and make lump sum investments when you have surplus investible funds for the long term.

Benefits of SIP

1. Timing the Market: When is the right time to invest? SIP eliminates this headache. In the long run, SIP negates market volatility and allows investors to gain in all market conditions.

2. Flexibility: You can start a SIP with just ₹100. You can pause SIP for a while in financial distress and then restart later. You also get to choose the SIP date. Salaried individuals can select a date a day after your salary date.

3. Discipline: Since SIP investments are made regularly on fixed dates, and the amount is automatically debited, it introduces discipline in terms of regularity and ensures adequate funds are in the account.

4. Rupee Cost Averaging: In SIP, you keep making investments at regular intervals. So, if the market falls, you will get more units, and when the market rises, the value of units goes up. In the long term, this brings down overall per-unit cost, resulting in more returns.
   
   

Benefits of Lumpsum Investments

A few situations in which lump sum investments score over SIP investments.

1. Rising Markets: Investing more in a rising market can lead to better returns. Let's consider an example where the mutual fund unit value increases by 1% in a month.

• Investor A: Investing ₹1,000 monthly, gains ₹10 (1% of ₹1,000).

• Investor B: Investing ₹10,000 monthly, gains ₹100 (1% of ₹10,000).

This example proves that B's higher investment results in a larger gain than A's smaller investments, even though the percentage increase is the same for both.

2. Cash Surplus: A common investor may opt for lumpsum investment in case he has received a huge amount of money by selling a property, or he has received arrears of past dues, or when he has received an annual bonus. In such scenarios, investing the surplus fund in mutual funds is better than a savings account to get better returns.

3. Short-term Investment horizon: If you want to invest for a short period, say in debt mutual funds, then only lumpsum investments would make sense, as SIP investments yield good returns over the long term.
   
   

Lump sum or SIP: which is better for you?

To understand Lumpsum or SIP, which is better for you, just go through the chart below and take a decision based on your cash flow, time horizon, investment profile and financial targets.

It would be best to remember that it is not this or that between SIP and Lumpsum. Both are two sides of the investment coin. Both have advantages and disadvantages, so depending on your situation, investment appetite and market conditions, you should choose one that suits you the best – it can be only SIP, only lump sum, or a combination of both. To simplify your life, you can download the HDFC Bank SmartWealth App, which will help you make the right choice.

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