SIP Or Lumpsum: Which Investment Method To Choose?

Published On: 24-Mar-2020

When it comes to investing in mutual funds, the investors may invest in two modes – Lumpsum investment or Systematic Investment Plan (SIP) investment. Let us discuss both these modes before deciding on choosing the most suitable investment method between SIP vs Lump sum. 

Lump sum Investment

It refers to investing the entire investment in mutual funds with a single purchase transaction. For example, if you have Rs. 50,000 to invest in mutual funds, you may choose to invest the amount in a single instance. As such, the entire investment amount gets invested in a single instance. However, investing in lump sum may carry a significant timing risk, as investment is at higher valuations.

SIP Investment

SIP is an investment option for the investors to make automatic regular investments in a mutual fund scheme of your choice periodically. In other words, SIP may be a specified sum of investments made automatically at periodic intervals. For example, if you wish to invest Rs. 1,20,000 in a year in mutual funds, you may either choose to make 12 instalments of Rs. 10,000 every month or choose to register a monthly SIP of Rs. 10,000, wherein you will only be required to register a SIP, and then the investments will be made automatically.

Benefits of SIP Investments over Lump sum Investments

Here are five benefits of investing through SIP, as against investing in a lump sum:

Financial Discipline

Making lump sum investments call for a manual investing decision every time an investment is required to be made. However, when one is choosing to invest through SIP, the investing actions are automated, post the one-time registration of SIP. As such, regular investments through SIP inculcate a sense of financial discipline into your lives and help you maintain your investing journey at a decent pace. 

Eliminating Emotional and Timing Bias

Investing in lump sum, especially in falling markets, requires you to tide over your own emotional bias to stop investing to prevent the reduction in invested value. Further, if you wait for the right time to invest in the markets, it will only result in delays in making investments. On the other hand, SIP investments continue to be made on a periodical basis, irrespective of whether the markets are falling or rising. As such, the emotional and timing bias automatically gets eliminated in this process.   

Rupee Cost Averaging

SIP often entitles the investor to avail of the benefit of Rupee Cost Averaging, which means that the cost of investments gets averaged over time. This is because one continues to invest across market ups and downs. When the markets are falling, one gets a higher number of units. When the markets are rising, one gets a lower number of units but benefits from the increase in the overall portfolio valuation. For example, if one has invested the first instalment of Rs. 10,000 at Rs. 20 per unit, and then the next SIP investment is made at NAV of Rs. 16 per unit, one may average the cost of investments for these 2 SIP instalments at Rs. 18 per unit. This phenomenon of Rupee Cost Averaging continues until the investor continues to make regular investments.  

Staggering the Investments over Period

Making lump sum investments require the entire investment amount to be available up front. On the other hand, the investor may stagger the investments over a period through SIP investments. This is because the investments are only required to be made at periodic intervals. As such, SIP investing is preferred for the investors having a regular flow of income, while lump sum investing is preferable when an individual has received any windfall income like annual bonus etc. 

Preferred for New Retail Investors

When one has just entered the world of investing, one is more inclined towards showing their investing acumen, than staying with the basic investing fundamentals. As such, ‘timing the market’ takes centre stage instead of spending ‘time in the market.’ When the markets are falling, one waits for the markets to fall further. When the markets are rising, one waits for the markets to get back at the reasonable valuations before investing any further to avoid loss in their investing decisions. SIP is therefore beneficial for such investors, wherein the investments continue to be made at regular intervals. 

With the above considerations in mind, one may find investing in mutual funds through SIP investments as a preferred medium. However, the type of funds one chooses to invest in may also require a shift in the investing preferences, as investing a lump sum in short term debt funds like liquid and overnight funds may not call for significant timing risk. As such, the investor must take an informed decision after analysing their preferences and investing requirements.