Lump Sum vs SIP Investments: What Works for You?

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Lump Sum vs SIP Investments: What Works for You? | WealthDesk

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This is often the dilemma – one has surplus money to invest but is confused between lump sum and SIP investments. Choosing between a one-time lump sum investment or a periodic SIP investment hinges on your familiarity with mutual funds, the fund you have in mind, and your financial goal.

SIPs are ideal if you are new to investing in mutual funds. They must also have sufficiently long time horizons to be beneficial. Therefore, a regular SIP investing in an equity scheme is also suitable for accumulating sufficient capital for a goal. For example, suppose you want to save a portion of your monthly income and want it to grow significantly over time to fund your child’s higher education. In that case, an equity SIP is a way to go. If necessary, seek the assistance of a fund advisor.

But, suppose you have extra cash, such as a bonus, proceeds from a property sale or a retirement corpus, but are unsure about how to invest it. Then, you can consider a one-time investment using a lump sum in a debt or liquid fund.

Therefore, SIPs are recommended for equity-oriented schemes, whereas lump sum investments are better suited for debt funds. But when it comes to market conditions regarding lump sum vs SIP, you can invest with a lump sum if the market has been trending upward and is believed to continue doing so for a long time. On the other hand, SIPs are best suited for a volatile market phase.

How SIP works

Investing via SIPs is straightforward. You just need to plan out the amount, no matter how big or small it is.

The next step is to select the fund in which you want to invest. This method requires a significant financial commitment because the estimated trade price is cut from your account (savings) each month. Systematic and pushed trades will keep you engaged in the fund, regardless of market ups and downs. When you invest in a mutual fund, certain amounts of units are reserved for your name based on the fund’s NAV on that date. You benefit from more units during market downturns when the NAV is low.

“Market timing of mutual fund investments necessitates a full knowledge of macroeconomic circumstances, global political trends, policy effect, fundamental assessment, technical analyzation, and so on,” explains Sahil Arora, head of Paisabazaar.com, a virtual debt syndication service, during an interview with a national daily. “Most retail investors may find it difficult to keep track of these. Because SIPs ensure regular and automatic investment, choosing the SIP mode will average out the investment cost during market corrections, saving investors from the conundrum of timing their equity fund investments.”

Investing a Large Sum of Money

A lump sum invested may be the preferred place if you want to assign a large portion of your income to mutual funds or if you have a windfall gain that you want to invest in mutual funds.

All you have to do is select your fund(s) and calculate the money you want to invest in them.

It is appropriate for people to invest in debt funds who want to achieve short-term, financial goals. For instance, if you plan to invest for 2-3 years, capital safety is essential, and debt funds are a generally secure fixed-income investment.

When the market and stock valuations are low, which is called the bear market phase, most people choose to make lump sum investments in mutual funds. This is because mutual funds with low NAVs can acquire more units, which they can sell when the market is high.

Which One’s Better? Lump sum or SIP investment

Whether you invest with an SIP in equity shares or make lump sum investments in debt funds, both have their advantages. However, lump sum investors must constantly monitor market movement. Meanwhile, SIP investors can unwind as their assets drive into the vicious market loop.

These are the benefits of a lump sum payment:

  • Significant financial investment
  • Suitable for long-term use
  • Convenient one-time payment

Benefits of SIP include:

  • Investment prudence
  • Risk mitigation
  • Adaptability
  • No hassles

Lump Sum vs SIP

ParameterSIPLump sum
Cash flowRegularOne time only
Cost of investmentLess but regularOne-time investment, but high
FlexibilityVery highVery low
Risk appetiteSIP risk is low to mediumMedium to high

Conclusion

A clear SIP vs lump sum comparison is complex. As they go hand in hand, there is always an ‘and’ between them.

Investing with a lump sum or SIP has its unique advantages and disadvantages. They work for stockholders during distinct periods. Therefore, an investor cannot select only one type of investment option.

However, one must understand the distinction between SIP and lump sum. As a result, start investing early to reap the long term benefits of the power of compounding.

As a cardinal rule, it is best to choose an investment option (SIP or one-time investment) based on your financial goals. And voila – you’re earning the returns you want on your investment! Start your SIP journey by investing in WealthBaskets

FAQs

What is SIP in mutual funds?

An SIP or systematic investment plan is the most suitable way of investing in mutual funds. By SIP, you can shake up your investments over time through investing fixed sums at regular intervals. SIP frequency can be monthly, bi-annual, weekly or quarterly, as per your need and requirement.

How does SIP work?

Investing via SIPs is straightforward. You just need to plan out the amount, no matter how big or small it is. The next step is to select the fund in which you want to invest. This method requires a significant financial commitment because the estimated trade price is cut from your account (savings) each month. Systematic and pushed trades will keep you engaged in the fund, regardless of market ups and downs.

How to stop an SIP online?

SIP can be stopped online just by logging into your account with the fund house and then submitting the ‘stop SIP’ form. You can stop your SIP with just a few clicks while sitting at your home.

Which is better SIP vs lump sum?

Lump sum or SIP both have their own advantages and disadvantages. They work for stockholders during distinct periods. Therefore, an investor cannot select only one type of investment option. However, one must understand the distinction between SIP and lump sum. Start investing early to reap the long-term benefits of the power of compounding. It is best to choose an investment option (SIP or one-time investment) based on your financial goals.