SIP vs Lumpsum Investment in Mutual Funds & Which One Should You Opt?

difference between lumpsum and sip

SIP (Systematic Investment Plan) and lumpsum are the two popular ways to invest in mutual funds. Both are invested to generate returns over some time. Through either route, investors can invest in any number of mutual funds. Invest as suited to your financial goals, risk appetite, and time horizon.

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 an article to learn more about the difference between SIP and lumpsum in a mutual fund and other important factors in detail.

Table of Contents

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What is SIP in a Mutual fund?

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, 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 instill a sense of financial responsibility in the long run.

What is Lumpsum in a Mutual fund?

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.

Difference Between SIP and Lumpsum in Mutual Funds

Given below are the key differences between SIP and lumpsum(one-time) investment:

Differences SIP(Systematic Investment Plan) Lumpsum (One Time Investment)
Need for Monitoring the Market Investors should keep tabs on the market performance regularly 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.
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.
Liquidity SIPs provide liquidity, as partial withdrawals can be made at regular intervals. Lumpsum investments usually lock in funds for longer, with withdrawals often subject to capital gains tax if done early.
Returns over Time SIPs allow investors to accumulate wealth gradually, often generating steady returns over time, especially in the long run. Lumpsum investments can yield higher returns if invested during a favourable market condition but can also result in losses if invested at an inopportune time.
Ideal Investor Profile SIPs are ideal for long-term investors who prefer a disciplined, consistent approach with lower initial capital. Lumpsum investments are suitable for investors with a higher risk tolerance who have substantial capital to invest at once.
Investment Amount SIP allows investors to invest small amounts regularly, making it suitable for those with limited capital. Lumpsum requires a significant amount to be invested at once, which might not be accessible to all investors.
Risk Exposure SIPs reduce the risk of investing in a volatile market, as investments are spread over time. Lumpsum investments carry a higher risk if the market is volatile, as they are exposed to market fluctuations at the time of investment.

Benefits of SIP and Lumpsum Investments

A SIP is an efficient, disciplined investment into mutual funds, enabling a person to invest a fixed sum regularly, irrespective of market conditions. A lumpsum investment involves simultaneously inputting much money into an asset or investment product. Below are the benefits for both:

Basis Benefits of Lumpsum Benefits of SIP
Return Potential A lump sum investment can generate higher returns if done at the right time. This means that the entire invested amount starts earning returns immediately. SIP helps an investor in disciplined investing, wherein it will make investments by contributing a fixed amount regularly. It ensures that individuals do not succumb to spending it elsewhere.
Market Exposure Lumpsum investment gives flexibility in selecting avenues of investment. It allows the investor to diversify the portfolio according to the investment time's financial goals and risk appetite. By investing consistently over time, SIP averages out the cost of purchasing mutual fund units. When markets are down, more units are bought; when markets rise, fewer units are purchased.
Tax Benefits and Compounding Some lumpsum investments, like tax-saving mutual funds (ELSS), give tax deductions under Section 80C of the Income Tax Act. It helps reduce the investor's taxable income and, hence, overall returns. SIP helps to gain the power of compounding. As investments grow over time, the returns generated on the principal amount and earned returns compound, accelerating wealth creation for the investor.
Flexibility and Minimum Investments Unlike SIPs with a minimum limit on a monthly contribution, lump sums carry no such restriction. Whatever capital a person has, they can invest in only one sum. SIP gives flexibility with the amount and investment frequency. SIP contributions can increase or decrease temporarily and be suspended to establish better control over finances.
Ease of Management  Lumpsum investments are ideal for individuals who receive bonuses, inheritance, or matured investments. These large sums can be effectively deployed to maximize returns. SIP allows investors to align their investments with long-term financial goals, whether retirement, children's education, or purchasing a home, making planning and tracking progress toward these objectives easier.

Factors to Consider Before Investing in SIP and Lumpsum

Before choosing between SIP and lumpsum investment, many other factors would impact the choice of investment strategy. These factors include financial goals, risk appetite, and available capital.

1. Investment Horizon

For SIP, an investor benefits from rupee cost averaging and compounding with more extended investment periods. Lumpsum is ideal for people looking to invest for quicker returns or with a short-term goal.

2. Risk Tolerance

SIPs are generally less risky since they are made regularly over time, helping smooth out market volatility. In contrast, lumpsum investments are more dangerous because the investor faces market fluctuations.

3. Market Conditions

SIPs are ideal during times of uncertainty or volatility because they reduce the impact of short-term fluctuations in markets. Lumpsum investments work better when the market is sound or is likely to rise with high returns.

4. Available Capital

A lumpsum investment may be an attractive option if you have a significant sum of money available at once. However, if you have limited funds, SIPs allow you to invest small amounts regularly without requiring significant initial capital.

5. Financial Goals

SIPs are suitable for long-term goals such as retirement or education as they have consistent, steady growth. Opt for lumpsum for immediate requirements to get a more substantial sum for a shorter to medium-term goal.

6. Liquidity Needs

If you need to withdraw money quickly, SIPs are much more flexible because you can take the amount invested back periodically. Lumpsum investments generally tie the capital up longer and have penalty clauses.

7. Cash Flow and Income

SIPs are apt for those with a regular, predictable income since they would provide regular sums without affecting their budgets. Lumpsum investments are suitable for those having inconsistent cash flow and windfalls.

8. Tax Impact

Consider the tax implications for your investment. Some SIPs in the tax-saving schemes, namely ELSS, provide tax benefits, whereas one-time lumpsum investments offer higher immediate tax liabilities.

Which is Better - SIP or Lumpsum in Mutual Funds?

Are you searching "SIP or lumpsum which is better"? Continue reading to gain an idea about SIP vs lumpsum, which is better in a mutual fund!

Here’s a side-by-side comparison of SIP and Lumpsum investment in a table format:

Factors SIP Lumpsum
Investment Type Regular, periodic investments (monthly/quarterly). One-time large investment.
Initial Investment Low initial investment (as low as ₹500). Requires a significant sum of money upfront.
Market Risk Reduce market risk via rupee cost averaging. There is a higher risk as the entire amount is exposed to market fluctuations immediately.
Return Potential Lower short-term returns but steady over the long term. Higher returns are possible if invested during a market uptrend.
Volatility Impact Less affected by market volatility due to spread-out investments. More exposure to market volatility due to a single investment point.
Flexibility Flexible: You can pause, increase, or stop payments. Less flexible once invested; harder to adjust without incurring costs.
Ideal For Long-term goals (retirement, children's education, etc.). Those with a large sum to invest and who can handle market fluctuations. 
Capital Requirements Ideal for people with limited capital. Suitable for investors with large sums (lumpsum capital).
Compounding Benefits from compounding over time. Compounding begins only after the entire amount is invested.
Ease of Entry Easy to start with small, regular amounts. Requires good market timing and a large amount of capital.
Investment Duration Suitable for long-term investment. You can use it for both short-term and long-term, depending on market timing.

This table highlights the differences between SIP and lumpsum investments, helping you decide which method suits your financial situation and investment goals.

 

Each SIP and lump sum has specific advantages suitable for the goals, risk-taking capacity, and available capital in the eyes of the investors. Those who want an investment that is disciplined for an extended period prefer to opt for SIPs, and those whose market is well-favoured tend to be more rewarded for making lumpsum investments.

The choice between the financial statuses of investors depends on individual and market preferences.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about SIP Vs Lumpsum

How much should I invest in an MF through SIP investment?

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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, based on their needs and goals.

How to calculate a suitable amount to make a lumpsum investment?

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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 by the user.

Which is better: a SIP or a one-time investment?

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Lumpsum investments give higher returns if timed. They carry the risk of bad timing and losses. SIPs are more consistent and risk-managed. It spreads investments over time, helping to average out market volatility.

Should I be able to convert a lumpsum investment into a SIP investment?

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Yes, many mutual funds offer the option to switch from a lumpsum investment to a Systematic Investment Plan (SIP) or vice versa.

Are investing in Lumpsum riskier than a SIP?

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Yes, investing in a lumpsum is riskier than an SIP. Lumpsum exposes the entire investment amount to market volatility at once. A SIP spreads out the investment over time. It mitigates the impact of market fluctuations and reduces risk.

What are the benefits of SIP and lumpsum?

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SIP allows you to invest small amounts regularly. It is ideal for long-term wealth creation with lower risk. Lumpsum investment involves investing a large amount at once. You enjoy potential market growth and compounding. It is suitable for those with a higher risk tolerance and a large sum of money to invest.

Why do you need to invest in SIP over lumpsum?

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Investing in SIP over lumpsum offers several advantages. More so if you're looking to create long-term wealth, SIP helps to mitigate the impact of market volatility through rupee cost averaging. This reduces the risk of making poor investment decisions based on market timing.

What is the difference between SIP and lumpsum in mutual funds?

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There are many differences between SIP and lumpsum in mutual funds. SIP involves investing a fixed amount regularly. It benefits from rupee cost averaging and reduces market timing risks. A lump sum is a one-time significant investment. It benefits from immediate market growth but with higher exposure to market volatility.

Why lumpsum investing options are better?

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Investing a large amount in one go leads to significant growth. Do it during market upswings. Lumpsum investments are better for long-term financial goals. They allow the investment to compound over a more extended period.

Should I invest in lumpsum every month?

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Yes, you can invest a lumpsum every month. But this approach needs more automation and rupee cost-averaging benefits of a SIP. Regular lumpsum investments need more discipline and market timing.

What factors should you consider before investing in SIP and lumpsum?

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You should consider a few things. Consider the market conditions, investment horizon, risk tolerance, cash flow, and investment amount.

Which is more beneficial, SIP or lumpsum?

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Whether a Systematic Investment Plan (SIP) or lumpsum investment is more beneficial depends on many things. It depends on your financial goals, risk tolerance, and market understanding.

Other Important Articles about Mutual Funds

What is Growth Mutual Fund?
CAGR vs Absolute Return
What is Interval Fund?
What is Mutual Fund?
ETF vs Index Funds
What is Lock in Period in Mutual Fund?
What is Systematic Investment Plan(SIP)?
Types of Mutual Funds in India
Arbitrage Fund vs Liquid Funds
Flexi Cap vs Multi Cap Funds
How Mutual Funds are Taxed?
What are Arbitrage Funds?
Gold Mutual Fund vs Gold ETF
What are Debt Funds?
What is Equity Fund?
IDCW vs Growth
What is Hybrid Fund?
Types of Mutual Fund Returns in India
What is Statutory Liquidity Ratio?
What is Index Fund?
Open Ended Fund vs Closed Ended Fund
What are Multi Cap Mutual Funds?
SIP vs Mutual Funds
What is Income Fund?
Sharpe Ratio vs Treynor Ratio
What is International Fund?
Direct vs Regular Mutual Funds
Index Funds vs Mutual Funds
IDCW vs SWP
What are Corporate Bond Funds?
Difference Between Smallcase and Mutual Funds
Value Funds vs Growth Funds
SIP vs PPF
Mutual Fund Charges or Fees
XIRR vs CAGR
What is Money Market Fund?
ETF vs Mutual Funds
What is XIRR in Mutual Fund?
Fixed Deposit vs Mutual Funds
What are Leveraged Funds?
Liquid Funds vs Debt Funds
Active Funds vs Passive Funds
What is Lumpsum in Mutual Fund?
What are Commodity Mutual Funds?
NPS vs Mutual Funds
Sharpe Ratio vs Sortino Ratio
Bonds vs Mutual Funds
ELSS vs SIP
Balanced Funds vs Equity Funds
Mutual Fund vs Life Insurance
What is Exchange Traded Fund?
Equity Funds vs Debt Funds
Growth Fund vs Dividend Fund
What are Sectoral Funds?
PPF vs Mutual Funds
SIP vs Lumpsum in Mutual Funds
ETF vs FOF
What is ELSS?
What is Capital Protection Fund?
Annualised Return vs Absolute Return
SIP vs RD
What is a Balanced Fund?
Mutual Funds vs Stocks
Mutual Funds vs Hedge Funds

Disclaimer

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  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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