Investments in mutual fund schemes can be done through two modes – through a one-time lump sum payment or in systematic instalments called SIPs (Systematic Investment Plans). Both these investment modes have their respective pros and cons which result in the age-old debate – Which is better – lump sum or SIP?
Before we assess the pros and cons of each, let’s quickly have a look at what these investment modes mean –
¨ Lumpsum investment is when you invest a lump sum amount once to buy a mutual fund scheme or to make an additional investment into an existing scheme.
¨ SIP, on the other hand, involves investing a fixed amount of money regularly at fixed dates. These dates can be daily, monthly, quarterly, half-yearly or annually as per your choice. For example, if you start a SIP of Rs.5000 on 1st December 2020 and choose the monthly mode, your next SIP investment would be made on 1st January 2021, and thereafter it would be done on the 1st of every month for the period that you choose.
Pros and cons of lump-sum investment in a mutual fund
Here are some of the advantages and drawbacks of choosing the lump sum mode of investment-
· Ease of investing at once without any commitment to further investments
· Suitable for those investors who have a lump sum amount of money to invest
· Gives better returns when the markets are rising
· Since only a one-time investment is required, investors might not develop a regular saving habit. They might invest randomly which would make it difficult for them to create a good corpus for their financial goals
· You have to time the market for maximum gains. If the market falls after your investment, you will make a considerable loss
· Lump-sum investment might not be suitable for small investors who have limited funds at their disposal to invest in mutual funds
Pros and cons of SIP investment in mutual funds
· SIP plans are suitable for all types of investors. Even small investors can easily invest in mutual funds through SIPs because the minimum investment is Rs.500, which is easily affordable.
· Under the SIP plan, investing becomes automatic as the SIP amount is deducted directly from your bank account. Thus, by opening a SIP account, you can develop a regular saving habit. This habit helps you create considerable corpus through regular investments and attractive returns.
· The main benefit of SIP is that you don’t have to time the market. This is because, under SIPs, you get the benefit of rupee cost averaging. You get the NAV of the date on which the SIP investment is made. These different NAVs average out the effective NAV of your SIP investments through rupee-cost averaging and help in minimizing the volatility risk.
· SIP is a better alternative in a falling market because you get a higher number of units. Thereafter, when the market corrects itself and rises, you can earn higher returns.
· With SIPs you can also benefit from the power of compounding. It is nothing but adding the profit earned to the principal amount and then reinvesting the entire sum to increase the profits. The power of compounding over long-term, if invested in the right mutual fund, helps grow your wealth exponentially.
· If the market is rising, you will lose out on the returns if you invest through SIPs
· Since small investments are made over time, the overall return under the scheme might be lower compared to lump sum investments
Which one should you choose?
The choice between the best SIP to invest in or the best lump sum investment plan boils down to your requirements and suitability. If you have a considerable amount of money and want to make a lump sum payment one time, lump-sum investment is the ideal choice as you can invest once. However, you should carefully time the market for investing at the right time to get the maximum returns on your investment.
However, if you want to invest small amounts regularly, or if you are new to the mutual fund domain and want to invest slowly, SIPs are better because there are many SIP advantages which you can get. They help you save small amounts regularly and create a good corpus. They are affordable and also free you from the task of timing the market, which might be difficult for amateur investors. Moreover, if you choose the best SIP plans, you can also earn attractive returns.
So, understand the difference between these two modes and choose your preferred mode based on your suitability and investment requirements.