SIP Vs Lumpsum: Which is Better for Investment?

Choosing the right investment option is important in life to upgrade your financial future. However, choosing the right investment method is more important so that it does not over burden your present. Every individual is keen on investing in mutual funds^^ these days but little do they which method to opt for. SIP Vs Lump Sum method of Mutual Fund Investment: Which is better for investment? Let us put an end to this long ongoing debate that confuses every investor every time they think of investing in Mutual Funds step by step.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

What is SIP?

SIP or Systematic Investment Plan is one of the 2 methods of making investments when it comes to Mutual Funds. One of the reliable sources of investment for a long term period, SIPs are provided by many banks, mutual fund houses, and various financial institutions. If the investors invest in the right SIP, the chances of great returns are higher than any other investment option available.

Some of the main features of SIPs are:

  • SIP is an investment plus savings plan

  • With regular investments under the SIP, a savings habit is inculcated amongst the investors.

  • Installments under SIP can be weekly, monthly, or quarterly as per the convenience of the investor.

  • Monthly installments can be as low as Rs. 500 in the case of some Systematic Investment Plan schemes.

  • SIP is considered to be very helpful in managing the financial burden during a crisis situation.

  • It helps in building a decent financial corpus after retirement

What is Lump Sum?

The Lump sum method of investment is another way of making investments in the Mutual Funds Scheme. It is considered wise to opt for the lump sum method of investment in case the investor has a great financial corpus to invest.

A huge corpus can be from sale of house, retirement pension amount, salary bonus, inheritance, etc. which the investor holds with them and now wishes to invest instead of just keeping the money in the bank. It is more advisable to go for the lump sum method of investment in case the investor is willing to invest in debt funds as their investment time is less than 3 years. Having said that, the lump sum method can also be used to invest in equity mutual funds.

SIP Vs Lump Sum

sip-vs-lumpsum sip-vs-lumpsum

Here are the key differences between the Systematic Investment Plan option and the Lump Sum investment option in mutual funds:

Features SIP Lump Sum
Market Monitor It is advisable to keep a check on the market cycle during the complete SIP tenure. Market monitoring is not essential as investments are generally for the long term.
Flexibility It is considered more flexible when compared to the lump sum method as investments can be made as per the financial condition of the investor. There is no flexibility in the lump sum method.
Market Volatility SIPs are not completely based on market volatility. The Lump sum method is highly responsive to the market.
Financial Discipline SIPs inculcate a financial discipline in the life of the investor as it develops a habit of regular savings. As it is a one-time investment method, there is no such financial discipline involved.

Benefits of SIP Over Lump Sum Investment Method

Here is a list of benefits why an investor should consider the SIP (Systematic Investment Plan) method over the lump sum method of investment:

  1. Rupee Cost Averaging

    SIP investment is highly suitable as it allows the investors to benefit from the rupee cost averaging process. Here the fund managers can easily:

    • Buy more when the market is low to reduce the per-unit cost

    • Buy limited shares when the market is super high

    An investor, if invests wisely, can easily diversify their portfolio by purchasing more shares at a lower cost rather than putting all their money in one.

  2. Affordable

    Undoubtedly (SIP) Systematic Investment Plan investment is affordable for all kinds of investors as investments as low as Rs. 500 per month can also be made for some mutual funds. SIP deposits bring a financial discipline in the life of an investor and also inculcate monthly savings habits. Regular deposits as per the affordability of the investor do not affect the pocket of the investor, leading to a better and more affordable investment option.

  3. Portfolio Diversification

    As an investor can purchase multiple SIPs for a significant period rather than putting all their money on just 1 investment option. This makes their investment portfolio diverse leading to better and higher returns in the long term period.

  4. Ideal for New Investors

    Minimum monthly investment amounts, tax saving under Section 80C, better returns, etc. makes a SIP investment an ideal investment option for both new investors as well as market experts. Investing in ELSS mutual funds leads to significantly less market exposure and lower risks involved.

People Also Read: sip calculator

Benefits of Lump Sum Over SIP Investment Method

The following are the benefits of the lump sum method over the SIP method of investment in mutual funds:

  1. Best Suited for Self-Employed Individuals

    For people not involved in a regular and steady source of income, the lump sum method of mutual fund investment can be considered more fruitful than the SIP method. SIP requires regular deposits whereas a lump sum involves a one-time deposit, making it highly suitable for investors earning irregular income or profits.

  2. High Tax Benefits

    The Lump sum method of mutual fund investment offers tax benefits up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961. High returns can also be expected if investments are made in ELSS funds for a long-term period.

SIP Vs Lump Sum: Which is Better?

As we have understood about both SIP and Lump Sum methods of investment in mutual funds, it turns crucial when a choice has to be made between the two. Here are a few factors to be considered before opting for any investment type:

  1. Personal Risk Appetite

    It is very important to understand the personal risk appetite of the investor before opting for any of the two methods of investment in mutual funds.

    The main difference between SIP and the lump sum is the degree of risk involved in their deposits. On one hand, SIP comes with capital protection as regular deposits are involved, on the other hand, lump sum requires a big corpus in one go.

    For example, if you wish to invest Rs. 2,40,000 in mutual funds in a financial year:

    • You have the option to pay Rs. 20,000 monthly if you opt for the SIP method. This will not overburden the pocket of the investor.

    • If you opt for the lump sum method, Rs. 2,40,000 have to be deposited one-time.

    An investor needs to know which method suits their finances the best.

  2. Returns Involved

    Returns in both lump sum, as well as SIP, depends upon the market conditions at the time of withdrawal. However, it is important to know that in a general scenario:

    • SIP outperforms Lump Sum in case of unfavorable markets.

    • ELSS Lump Sum investments offer higher returns when the market is steady.

  3. Lock-in Period

    In general, SIP comes with a minimum 3-year lock-in period whereas Lump Sum investments are unlocked altogether after 3 years.

    Example,

    1. Lump sum lock-in

      Mr. X deposits the entire corpus in one go under the lump sum method on September 1st, 2018. After the completion of 3 years, that is, on September 1st, 2021, the deposited amount will mature and be available for withdrawal completely.

    2. SIP lock-in

      Mr. X deposits some amount in mutual funds under the SIP method every month, that is, September 1st, 2018, October 1st, 2018, November 1st, 2018, and so on. 3 years later, the lock-in period will end and the units will mature on monthly basis, that is, September 1st, 2021, October 1st, 2021, November 1st, 2021, and so on.

SIP plans available in

5 YEARS SIP Plans
Returns upto 19%
7 YEARS SIP Plans
Returns upto 18%
10 YEARS SIP Plans
Returns upto 16%
12 YEARS SIP Plans
Returns upto 14%
15 YEARS SIP Plans
Returns upto 15%
20 YEARS SIP Plans
Returns upto 15%

Conclusion

Investment in mutual funds through the SIP (Systematic Investment Plan) or Lump Sum method is completely the choice of the investor and their risk-taking appetite. An investor should thoroughly scrutinize the mutual fund, its return performance, method of payment beneficial, etc. before investing their hard-earned money anywhere.

Happy investing!

+The Returns are 5 years of cost-adjusted returns of large-cap funds as of 18 Dec 2023, as per moneycontrol.
^If premium payable is below Rs. 2.5 lakh in any year . Standard T&C Apply
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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