Difference between SIP VS Lumpsum Investments in Mutual Funds
One can think of mutual funds as a pool of funds collected from several investors. The corpus is then invested in securities, such as bonds, stocks, and other asset classes. Moreover, there are 2 methods of investing in mutual funds, namely SIPs and lumpsum investments. Individuals can opt to make a lumpsum payment or invest through a systematic investment plan (SIP) based on several factors.
Read through to gain an insight into both these investment methods. This article will also draw a comparison of SIP vs. lumpsum.
What Is a SIP Investment?
Before delving into SIP vs. lumpsum mutual funds, it is imperative to know what a SIP is –
A SIP or systematic investment plan allows an investor to allocate a small sum of funds regularly in their preferred mutual fund scheme. As the term implies, this is a systematic method of allocating fixed amounts of money in a periodic manner. This can be semi-annually, quarterly or monthly, etc.
On activating a systematic investment plan, a fixed amount gets deducted from an individual’s bank account on a monthly basis. As a result, achieving one’s financial goals can become easier if he/she invests steadily in this manner.
Unlike a lumpsum investment, individuals spread their investment over time with a systematic investment plan. Therefore, one need not have substantial funds to get started with an MF investment through SIPs. This, in turn, helps them instil a sense of financial responsibility in the long run.
What Is a Lumpsum Investment?
A lumpsum investment enables investors to deposit the entire amount available in one go for acquiring their desired number of mutual fund units. This route of investing tends to be beneficial when a fund’s net asset value or NAV is less. Here, a lower NAV allows individuals to acquire more units. On the other hand, a higher NAV reduces the number of units for an investor.
Now, with the basic idea of the investment modes clear, let’s move on to the difference between SIP and lumpsum.
What Is the Difference Between SIP and Lumpsum Mutual Fund?
Given below is a comparative analysis of SIP vs. lumpsum:
| Basis of Comparison | SIP | Lumpsum |
| Need for Monitoring the Market | Investors should keep tabs on the market performance on a regular basis as they can enter various market cycles during their SIP tenure. | Investors need not monitor the market as lumpsum investments are usually made for the long term. |
| Flexibility | SIPs are a more flexible investment method compared to the lumpsum option. | Lumpsum investments lack flexibility. |
| Response to Market Volatility | SIPs are not very reactive to market volatility. | Lumpsum investments are highly responsive. |
| Inculcation of Financial Discipline | This investment option can inculcate financial discipline in investors as they get into the habit of investing in a planned manner. | It does not inculcate such discipline as the investment is made at one go. |
SIP vs. Lumpsum: Which Is Better?
Are you searching “SIP or lumpsum which is better”? Continue reading to gain an idea regarding SIP or lumpsum, which is better in a mutual fund!
Investments through a lumpsum and a SIP comes with their own set of benefits. Investors can find it challenging to choose one out of these two. That said, knowing the differences between the two will help one make an informed decision.
The major difference between a lumpsum investment and a SIP is the cash flows. Individuals allocate funds just once in a lumpsum investment. But in a SIP, they invest on a regular basis.
Many individuals prefer a SIP because it inculcates financial discipline. However, this is not the case for a lumpsum investment as it involves allocating funds at one go.
Moreover, individuals must consider some critical factors when deciding upon a suitable investment mode for them. These factors include the type of fund, disposable sum, investors’ financial goals, and investment objectives.
That marks the end of this article on SIP vs. lumpsum. Potential investors must consider the various points mentioned above in order to make an informed decision when choosing one of these investing routes.
Frequently Asked Questions
How much should an individual invest in an MF through SIP investment?
A majority of mutual fund houses allow investors to initiate SIP investments with only ₹500. However, there is no upper limit. So, an individual can invest any amount, for that matter.
How to calculate a suitable amount to make a lumpsum investment?
To determine a suitable amount of investment, one can use a lumpsum calculator. It is an online financial tool that allows investors to calculate the return on a lumpsum mutual fund investment. This calculator calls for an individual to input the investment period (in years), investment amount, and the annual rate of return. After entering these values, the tool displays the expected amount and the wealth gained to the user.