Advantages of Lump sum investments vis-à-vis SIP
What is a Lump sum investment?
An investor can invest in mutual funds in a lump sum or through Systematic Investment Plans (SIPs). While SIP involves making regular investments into mutual funds, lumpsum investing refers to investing a large amount in a single transaction. Each of the investing modes has its pros and cons. The investors must choose a specific investment mode based on their financial goals, availability of investible funds, and risk appetite. Know more about the differences between lumpsum investing and SIP investing.
Benefits of Lump sum investment vs. SIP
Here are the benefits of lumpsum investment vs. SIP:
No Investment Commitments
Investing in a lump sum does not require future investment commitments from the investors. It is often preferable for those who are self-employed and may not have regular surplus income flows.
Better Control over Investments
When an investor wants to make a lump sum investment in mutual funds, they can control the timing of his/ her investments. One can choose to invest when the markets are at lower valuations. As such, it allows the investors to make the most of market corrections.
Utilising the Windfall Gains in Better Manner
One may receive windfall receipts during the year, e.g., annual bonus, ex-gratia amount, arrears, leave encashment, etc. One can utilise the windfall receipts better if one decides to make a lump sum investment instead of SIP. In the case of SIP, the investible amounts are invested over a period, and thus, the balance amounts may continue to stay in savings bank accounts.
Beneficial in Bull Markets
Investing a lump sum is particularly helpful during bull markets. This is because it allows the investors to make the most of market rallies, as the entire investible amount stays invested during the whole period. This is in contrast with SIP investing, wherein the investment is made over time. As such, only a part of the entire surplus can earn at a given point in time.
Power of Compounding
Compounding refers to the phenomenon of existing returns on the investments earning additional returns for the investors. Albert Einstein once said, “compounding is the eighth wonder of the World.” This rightly highlighted the power of compounding wherein the returns increase exponentially as the holding period increases. Time is the most significant catalyst for the compounding of returns. However, with SIP investments, the average holding period of investments is lower than lumpsum investing in mutual funds. As such, lumpsum investing helps the investors to avail of the benefits of compounding in a better manner.