SIP v/s Lumpsum Investment: Which Method is Better?
As a part of your investment journey, you have to make a number of choices and decisions to optimise your returns. One such crucial choice is between SIPs and lumpsum investments. The SIP vs Lumpsum investment dilemma may be an old one, but it continues to concern new investors even today.
If you are at that point in your journey where you need to settle the Lumpsum vs SIP investment issue and make a choice, it can help to first understand how each of these strategies works. Thereafter, you can gain more clarity on the differences between SIP and Lumpsum investments to make a suitable choice.
What is a Lumpsum Investment?
A Lumpsum investment is a strategy where you invest a large sum of money in an asset or a scheme. This is typically a one-time investment, and the amount invested is locked in the asset for a specific tenure. You then earn returns on the Lumpsum amount invested in the form of interest or capital appreciation.
A fixed deposit (FD) is an excellent example of a Lumpsum investment. Here, you make a one-time deposit and earn interest on that amount over the FD tenure. This interest may be paid out periodically or reinvested in the deposit, depending on your preferences.
What is SIP?
A Systematic Investment Plan (SIP) is a strategy where you invest small sums of money in an asset or a scheme periodically, at regular intervals. You can make these small yet regular investments for a tenure of your choice, depending on the asset. The amounts invested continue to grow exponentially due to the power of compounding, thus generating returns.
SIPs are most commonly used to invest in mutual fund schemes. You can invest as little as ₹500 each month in the mutual funds of your choice and diversify your portfolio over the years.
SIP vs Lumpsum: An Illustrative Example
To decide which is better — SIP or Lumpsum investing, let us take up some hypothetical numbers to see how the returns would vary with each investment strategy.
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Scenario 1: You Make a Lumpsum Investment of ₹2.40 lakhs in a Mutual Fund
Let’s say the NAV on the date of investment is ₹10. So, you will receive 24,000 units in the fund when you make your Lumpsum investment. At the end of 1 year, say the NAV is ₹10.90. In this case, your investments would have grown to ₹2,61,600 (24,000 units X ₹10.90).
This means your total gains would amount to ₹21,600, which translates to returns at the rate of 9%.
Checkout our Lumpsum Calculator for better understanding -
Scenario 2: You Make Regular Monthly Investments of ₹2.40 lakhs in a Mutual Fund via a SIP
Let’s say the NAV of the fund varies as follows for the first 12 months of your SIP.
Month Amount Invested via a SIP NAV on the Date of Investment (Assumed) Number of Units Allotted (Investment Amount ÷ NAV) 1 ₹20,000 ₹10.00 2,000.00 2 ₹20,000 ₹10.55 1,895.73 3 ₹20,000 ₹10.20 1,960.78 4 ₹20,000 ₹9.55 2,094.24 5 ₹20,000 ₹9.44 2,118.64 6 ₹20,000 ₹9.32 2,145.92 7 ₹20,000 ₹9.25 2,162.16 8 ₹20,000 ₹9.10 2,197.80 9 ₹20,000 ₹9.45 2,116.40 10 ₹20,000 ₹9.85 2,030.46 11 ₹20,000 ₹10.50 1,904.76 12 ₹20,000 ₹10.90 1,834.86 Total ₹2,40,000 - 24,461.77
Here, the total amount you have invested is still ₹2,40,000. And you have been able to purchase a total of 24,461.77 units with this sum over the course of 12 months, making the average cost of investment ₹9.80 per unit. This is how rupee cost averaging works.
As for the returns, at the end of 12 months, your investments would have grown to ₹2,66,633.29 (24,461.77 units X ₹10.90). This means your total gains would amount to ₹26,633.29, which translates to returns at the rate of 11.097%.
Checkout our SIP Calculator for better understandingSIP vs Lumpsum: The Key Differences
The example above illustrates how SIPs, when done right, can generate higher returns and reduce the average cost of investment. Let us now take a closer look at the key differences between SIP and lump sum investments.
| Particulars | SIP | Lump Sum Investment |
|---|---|---|
| Frequency of investment | Regular | One-time |
| Investment costs | Lower due to rupee cost averaging | May be higher |
| Risk profile | Low to medium | Medium to high |
| Effect of market volatility | Low or negligible | Significant |
| Investment flexibility | High | Low |
| Suitable time horizon | Short-term to medium-term | Long-term |
SIP vs Lumpsum: Which is Better?
Now that you know the details of the SIP vs lump sum comparison, let us determine which of these may be better for you.
A lump sum investment may be suitable for you if you have a large sum of money in hand, and if you want to invest it in a gainful manner. It may also be ideal to choose a lump sum investment if the market is trending upward since you can lock in a lower investment cost.
On the other hand, a SIP may be better for you if you do not have a lump sum saved up and if you want to start investing anyway. Additionally, if the market is trending downward, you can use a SIP to take advantage of falling NAVs.
Conclusion
Now that you have a clearer picture of the differences between SIP and Lumpsum investments, you can weigh the pros and cons and figure out what works best for you. That said, it does not always have to be a choice between these two options. You can even invest a lump sum amount in one asset and start a SIP in another. This will help you tap into the advantages of both SIPs and lump sum investments.
