SIP vs Lumpsum: Which is better for investing?

Intelligent asset allocation and the right investment approach is key to building an all-weather mutual fund portfolio that shields you against macroeconomic uncertainties or market volatilities. Once you’ve determined the asset allocation, the fulcrum of investment returns hinges on your investment approach and methods.

When investing in mutual funds, there are two ways to get started – Systematic Investment Plan (SIP) and Lumpsum Investing.

In case of a Systematic Investment Plan, you invest a fixed amount of money at regular intervals. You can start, pause, and stop your SIPs whenever you wish to do so. You can get started with amounts as low as Rs. 500. Additionally, using an SIP yearly calculator can help you estimate potential returns based on your investment amount, expected rate of return, and duration. This provides valuable insights into the growth trajectory of your investment.
With a lumpsum investment, you make a one-time investment in a single go. This can be a great option if you’ve recently received windfall gains or huge profits from the sale of any asset(s), and have surplus cash available.

• Table of contents

• Difference between SIP & lumpsum Investment
• Advantages of investing via SIPs and lumpsum
• When to choose lumpsum investment?
• When to choose SIP investment?
• What are the factors you should consider before investing in SIP or lumpsum?

Difference between SIP & lumpsum Investment

In addition to the nature of investments, there are many differences between SIPs and lumpsum investments. Understanding these differences is key to planning the right investment approach that’s dovetailed to your goals, needs and investment horizon.

Here’s a table below to help you understand these differences better.

Parameters	Systematic Investment Plan	Lumpsum Investment
Market Conditions	There is no need to time the market as the investment is recurring, regardless of market conditions.	You can optimise and generate higher returns for your lumpsum investments if you're able to understand market cycles and trends.
Barrier to Entry	SIPs generally have a low barrier to entry, making them ideal for small investors and beginners. You can start with amounts as low as Rs. 500.	Lumpsum investments are generally preferred by experienced investors. Generally, you need at least Rs. 1,000 to make lumpsum investments.
Rupee Cost Averaging	Since SIPs happen via auto debits from your account, units are purchased when the NAV is high and when it is low.	Lumpsum investment is a one-time transaction, so the cost per unit depends on the NAV at the time of investment.
Compounding	By making recurring investments, you’re able to take full advantage of the power of compounding.	A lumpsum investment, being a one-time transaction, may not offer benefits of compounding on reinvesting gains.
Financial Habits	An SIP is a good way to budget investing into your monthly expenses. It is also helpful in instilling a disciplined investing habit.	A lumpsum investment is a great way to make the most of your excess funds, and it enables you to avoid overspending.

Advantages of investing via SIPs and lumpsum

There are several advantages of both lumpsum, and SIP, investments. Let’s look at these benefits in detail:

Benefits of investing via SIPs

In addition to offering the convenience of investing small amounts periodically, here’s a look at some of the other benefits offered by SIPs:

Disciplined savings over time

Saving regularly, irrespective of market conditions, helps you develop the virtuous habit of saving and investing. Apart from helping you accumulate a corpus for the future, it also helps you budget your finances, so you can make wise financial choices.

Beginner-friendly investments

With an investment amount starting at just Rs. 500, SIPs enable beginners to get started with investing, without the need to invest large sums of money. An SIP also eliminates the need to time the market, which means that you can get started at any point of time, without having to deep dive and analyse market conditions.

Rupee Cost Averaging in the long term

One of the most important advantages of the SIP route is Rupee Cost Averaging. With this approach, you can continue to invest regardless of market conditions. This means that as you continue to invest, regardless of market conditions, you buy lesser units when the markets are doing well and more units when the markets are down. This brings down your average cost of investing, thus, helping you optimise your investments.

Benefits of investing a lumpsum amount

Here are some of the advantages of taking a lumpsum approach to investing:

One-time investment

The lumpsum investment approach is a great way to make the most of your excess funds. Being a one-time investment, you can choose to invest for the long-term and choose debt funds that offer a mix of higher capital appreciation and stability of returns.

Goal-oriented investing

If you’re looking to grow your savings for a specific future event or goal, you can choose to make a lumpsum investment. This helps your investments grow over time, rather than lying idle in a savings account.

Reap the benefit of market cycles

Lumpsum investment is great for risk tolerant and more experienced investors as it allows you to make one-time investments into undervalued assets when the markets are bearish. Additionally, you can look for lucrative investment opportunities that can help grow your surplus savings and help you gain higher returns.
The approach you take to investing is an important decision that warrants a considerable amount of forethought. You can choose to invest through lumpsums or through an SIP, as both have their own advantages. You can weigh your options, and financial goals, to choose one of these two investment approaches. You can even go for a combination of both depending on your financial circumstances, goals, and risk appetite. You can use a lumspum calculator along with an SIP calculator for help with planning your investment strategy and determining how to divide your investments between the two modes.

When to choose lumpsum investment?

A lumpsum investment might be suitable in these situations:

• Market correction or downturn: If you believe the market is undervalued and could recover, a lumpsum investment can potentially yield higher returns because your entire investment gets market exposure from the beginning. Ensure you thoroughly research market conditions before committing. A market rebound is not guaranteed, even in downturns.
• Surplus cash: If you receive a large sum, like an inheritance or bonus, a lumpsum investment may be suitable.
• Short-term goals: If you have a short horizon of 1-3 years, have access to significant funds and are investing in a debt mutual fund or in a market that shows potential for growth, lumpsum could be suitable.
• Confidence in market outlook: If you strongly believe in the market's long-term growth potential, a lumpsum investment could be beneficial.

Remember, market timing is always challenging and even experts go wrong. Due to this, there is a higher risk with lumpsum investments.

When to choose SIP investment?

SIPs can be suitable for investors with the following considerations:

• Long investment horizon: SIPs are better suited for long-term goals like retirement, children's education, and wealth accumulation rather than short-term goals. Consistent investments in SIPs can benefit from the power of compounding over time.
• Reduced market timing risk: SIPs eliminate the need to time the market, allowing you to invest regularly, regardless of market conditions.
• Affordable instalments: SIPs allow you to start with small amounts, making them suitable for salaried professionals or those who do not have a large sum upfront to invest.
• Disciplined investing: SIPs encourage a disciplined approach by automating regular contributions, making it easier to stay on track.

What are the factors you should consider before investing in SIP or lumpsum?

Here are some factors to bear in mind:

Investment goals and horizon:

• Long-term goals: (Retirement, children's education) – SIPs can be more convenient owing to rupee cost averaging and disciplined investing.
• Short-term goals: Lumpsum could be considered if market conditions are favorable and you have high risk tolerance.

Risk tolerance:

• Higher risk tolerance: Comfortable with market fluctuations? Lumpsum could be an option, but market timing must be carefully considered.
• Seeking to reduce volatility risk: SIPs are typically more suitable as they offer mitigate market timing risk through rupee cost averaging.

Availability of funds

• If you have a large sum available for a one-time investment or do not have a predictable income flow, you may consider lumpsum.
• If you prefer to invest regularly in instalments, you may find SIPs more suitable.

Market conditions:

• Volatile markets: SIPs can leverage market ups and downs by buying more units when stock prices are down and fewer when they are up.
• Rising markets: Lumpsum investments have better return potential if the market is rising.

Investment knowledge and experience:

• Beginners: SIPs are generally recommended due to their simplicity and risk mitigation features.
• Experienced investors: Investors with market experience may consider lumpsum investments.

FAQs

Is lumpsum investment good?

Lump sum investing in mutual funds can offer higher returns potential in rising markets but comes with significant risk if the market is falling. It suits investors with high-risk tolerance, substantial capital, and long-term goals.

Which is more beneficial, lumpsum or SIP?

Lumpsum and SIP investments each have unique benefits. Lumpsum investments can suit those with high-risk tolerance and substantial capital, while SIPs provide flexibility and mitigate market timing risks through rupee cost averaging. Evaluating your risk appetite, finances and investment horizon and consulting a financial advisor can help determine a suitable strategy.

Can I convert my lumpsum mutual fund investment to an SIP investment?

While you can't directly convert a lumpsum investment into a SIP, strategies like Systematic Transfer Plans (STPs) and Systematic Withdrawal Plans (SWPs) offer effective alternatives. STPs allow you to transfer a fixed amount from a debt fund to an equity fund periodically, mitigating market timing risks and leveraging rupee cost averaging. SWPs, on the other hand, create a steady income stream by systematically withdrawing from your equity fund at regular intervals. Additionally, you can initiate an SIP in a scheme where you have already made a lumpsum investment. You may have to go through a quick application process.

Is a lumpsum mutual fund investment risky?

All mutual fund investments carry some risk. Equity funds typically carry high risk, especially in the short term. Lumpsum investments can additionally entail higher risk than SIPs due to market timing risk and volatility. If you invest during market peaks, downturns can lead to significant short-term losses and accurately predicting these movements is challenging.

Is lumpsum mutual fund investment taxable?

Yes. Capital gains on both lumpsum mutual fund investments and SIPs are taxable based on fund type and holding period. Equity-oriented funds incur short-term capital gains (STCG) tax at 15% for units sold within a year and long-term capital gains (LTCG) tax at 10% for gains over Rs. 1 lakh if held longer. Non-equity funds have STCG taxed as per your income slab for under 3 years and LTCG taxed at 20% after indexation for over 3 years.

Who should consider investing in mutual funds through SIP?

SIPs (Systematic Investment Plans) can be suitable for various individuals, including beginners, long-term investors and those seeking to mitigate market timing risk.

Can I do lumpsum every month instead of SIP?

Making lump sum investments every month can be an option if you do not want to commit to a fixed amount or date – say if your expenses are very dynamic or you have an irregular income pattern. However, if you plan to invest a fixed amount and have a regular and timely income flow, an SIP will be more convenient as the money will be automatically deducted from your bank account on the due date. Manually making a lumpsum investment every month may be tedious. It may also be harder to maintain regularity or discipline.

When is lumpsum investing better?

Lump sum investing in mutual funds can be advantageous in certain scenarios, but it's not inherently ‘better’ than SIPs. Lumpsum investing in mutual funds can be advantageous, particularly in scenarios where market timing is successful, as it offers the potential for higher returns through compounding and benefiting from market rallies. It also provides convenience, with a one-time decision and simpler management compared to SIPs. However, lumpsum investing carries significant market timing risk and requires a large upfront investment.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.