For decades, investors have been under dilemma in figuring out the right mode to invest in mutual funds – SIP or a Lump sum? Lump sum investment refers to a single payment mode. Risk appetite, investment objective, and tenure are taken into consideration for a lump sum investment in mutual funds. On the other hand, SIP or Systematic Investment Plan allows you to pay at fixed intervals of time. You can either opt for daily, weekly, quarterly, or monthly automated deductions under the SIP scheme.
Which one is better for investment – SIP or Lump Sum?
Let us take an example to understand this in a better way –
Returns during risking market:
Lump sum investment – 1200000 INR @ -0.73 CAGR for a period of one annum yields 1191999 INR.
SIP investment – (100000 x 12) INR @ 0.58 CAGR for a period of one annum yields 1203204 INR.
Advantages of preferring SIP investment over Lump Sum:
Compounding Power – With SIP, you can quickly increase your investment amount by a certain fixed amount. This enables you to receive compounding benefits which add on to your final returns on investment. This is what we technically refer to as compounding power. Mutual fund SIP calculator can help you figure out how your investment shall look like.
Stress is less with SIP – When you compare your SIP investment with your Lump sum, you will find the former one to be less stressful than the latter one. Besides, it keeps you motivated to invest more. Alternatively, in the case of Lump Sum, market volatility may force you to withdraw money under panicking situations. This is not the case with a diversified SIP investment as whatever you invest gets spread out without concentrating at one point.
There is no need to continuously monitor market – SIP eliminates the need to continually ponder around the market trends. Continuous market monitoring is essential for those who are entirely new to the market volatility and are confused about their entry time. In case you invest in a significant amount, you are likely to lose hold of a substantial fraction of your investment if the market crashes. With SIP, however, you do not need to worry about your investment, as only some fraction of it will be exposed to the market volatility.
Rupee-Cost Averaging – Investing through SIP mode will be utilizing fewer mutual funds unit when the market is up. When the market hits bottom, your SIP will use more mutual fund units to average your mutual fund investment. This helps in eliminating all the associated risks so you can confidently step in with your SIP investment.
Encourages you to invest – With a mutual fund SIP calculator at your fingertips, you have complete independence to invest a manageable fund under any mutual fund scheme (tax-saving). This helps you to organize all your investments efficiently and encourages you to save more.
These are some of the benefits why you should prefer to invest in mutual funds through SIP rather than Lump Sum investment mode. Click here to know more about Systemic Investment Plan benefits.