SIP Vs Lumpsum: Which is a Better Investing Methodology?

Posted On: 10 Jan 2023

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.

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.