SIP vs lump sum, which is better? Has this question been bothering you? Understanding how to invest via SIP and via lump sum will help you understand which option is better for you.
SIP vs Lump Sum
If you have a regular income and are able to save some money, opt for SIP. If you have a large sum of money, go for lump sum investment.
Two factors influence your investment: the amount you invest and the duration for which you invest. Basically, the more the money you invest and for longer, the better.
Let’s look at two arguments that show why comparing SIP and lump sum is not correct.
Case 1: You have a large amount of money: lump sum.
Let’s say you have ₹1 lakh. If you choose to invest this via SIP, you will divide this ₹1 lakh into smaller parts – let’s say ₹5000. Then every month, you’ll pay ₹5000 as SIP. For the first month, ₹5000 is invested and earns a return.
The next month, when you pay ₹5000 again, your total investment is ₹10000. But at the end of two months, only the first SIP (₹5000) will be subject to growth for 2 months. The SIP made in the second month will have been subject to growth only for one month. And this will continue with SIP payments made every month. In the first month, ₹95000 of your money will lie idle, earning no growth. In the second month, ₹90000 will be sitting idle, and so on.
If instead, you invested lump sum, all of the ₹1 lakh will be subject to growth. Therefore, you’ll earn a more money.
Check out the lump sum mutual fund returns calculator.
Case 2: You save a small amount of money every month: SIP
Let’s assume you earn ₹30000 a month. But after all expenditures, you are able to save ₹5000 every month. If you choose to invest using lump sum, you’ll have to wait for a while for your saving (₹5000 a month in this case) to accumulate to the desired size before you can invest. Till the point you reach that desired size, the money saved every month is not subjected to any kind of growth.
Check out the mutual fund sip calculator
So, the debate over SIP vs lump sum investment is flawed.
In Case 1, where you were assumed to have a large sum of money, the right way to invest would have been to opt for a lump sum investment. Whereas in Case 2, with smaller amounts saved every month, it made sense to go for an SIP.
Special Case: Markets overvalued
If the markets are over-valued and you are planning to invest lump sum, your investment could suffer.
There are many times when the markets are said to be over-valued. At these times, consolidation and correction is anticipated. If at this time you invest a large sum of money, it could suffer a loss in the immediate future. There are two ways to fight this problem:
#1. If you understand the markets: If you understand the markets and can sense when a market is over-valued, it is recommended you put on hold your investment till there is a correction. Alternately, you could invest in liquid funds and wait for the correction to take place.
#2. If you do not understand the markets: If you do not understand the markets and cannot tell if the markets are over-valued or not, you should take advantage of rupee cost averaging to shield you from overpaying. Invest lump sum in debt funds. Withdraw a fixed amount from this debt fund and invest as SIP in equity funds.
Debt funds are far less volatile and have relatively consistent returns. This way, your capital will keep growing at a lower but more stable rate. At the same time, you’ll be using rupee cost averaging to invest and reduce overpaying for your equity mutual fund investment.
Needless to say, people who have a good idea of the markets can employ this method for investing lump sum too.
When the markets are going on a bull run, you can make more money with a lump sum investment.
When the markets are volatile, SIP shields you from the risks of a bear market.
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