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What is lump sum?
The phrase ‘lump sum’ primarily means a large sum of money. In financial terms, it regards to the investment of a substantial sum of money at one go instead of breaking down into multiple installments.
What are lump sum investments and lump sum payments?
Lump sum investment involves the investment of the entire money available with an investor. For instance, if someone desires to invest the whole amount present with him in mutual funds or similar investment instruments, then it will be termed as lump sum investment.
Similarly, lump sum payment is just the same but in terms of payment. As the name implies, it does not involve any instalments or breakage of the whole amount.
How is lump sum different from SIP?
SIP or Systemic Investment Plans are completely the reverse of lump sum investments. The following points will help in assessing the differences between lump sum and SIP.
- Mode of investment
Primarily there are two modes or ways to invest money in a mutual fund- via systematic investing plan (SIP) or via Lumpsum .In case of SIP, the investment is done in installments. The whole amount is not investment at once as they follow a systematic way of investments which involves monthly deposits of a fixed sum by the investor.
On the other hand, lump sum investment comprises of a large sum of money invested at a single point. This does not take into account any breakage of the available amount or instalments.
- Potential investors
SIPs are quite safe as an investment instrument. Therefore, it is best mainly for the beginners, who have not yet studied the market or are not fully aware of the same.
In contrast, a lump sum investment is usually preferable for the bigger players. They have been in the field for a longer time and have gained enough experience about the market. Therefore, they can also handle the risks involved with investing a large amount.
- Time period of investment
SIP offers various schemes of investment to the investors. Therefore, the time period of those schemes is also different. They can be both open-ended and close ended or even hybrid.
However, in the case of lump sum payment, the amount is locked in for a particular period of time. Since, there is no need of installments, the amount is paid or deposited only once and is hence, fixed.
Which will give better returns – lump sum or SIP?
The answer to this question is dependent on several factors. Due to the fact that both the investment plans are different in every aspect, it is only natural that their benefits will also differ accordingly.
Moreover, investments are completely market-oriented. The market forces decide the benefits to be obtained from the investment. When the money market is growing, you can expect a higher return from a lump sum investment. However, during a falling trend, you are likely to incur better returns if you have had invested in SIP.
There cannot be a direct comparison of the returns as the amount and schemes of investment differ from one another. Additionally, the objective of these investments is also different. Hence, it would be unfeasible to compare both the platforms, since each plan has its own benefits to offer.
Advantages of Lump sum investment over SIP
Both the investment plans differ greatly in terms of investment approach as well as the risk appetite.
However, lump sum investment has an upper hand when it comes to certain advantages over SIP. The following points showcase the benefits of investing through the former.
Lumpsum investments are more convenient as compared to SIPs, because in the former case, you invest once and watch your investment grow, whereas for the latter case, you will be required to make timely payments.
Moreover, it creates a psychological cycle of repeated checking for profits in case you have invested through SIP. However, you can sit back after investing in lumpsum.
- Minimum charges
As the lump sum investments are made for one time, therefore, they incur rare minimum charges as compared to periodical investments. These have lower transaction costs as well as lower maintenance costs.
On the other hand, the SIPs have exit load along with taxation liabilities, which is absent in lump sum investments. Hence, one can experience the privilege of investing a large amount at one go.
- Appreciation of capital
As already mentioned, lumpsum investments are meant for longer duration, they have enough time to grow in the market. Simply put, the wealth involved in the lumpsum investment gets appreciated in the long run.
Additionally, the lump sum investment also has the time to adjust to the market changes too. As a result, it will be capable enough to significantly grow.
Factors to consider before investing in lump sum investment
Lump sum investments take large amounts at once; hence most investors often find it difficult to let go of the amount. Nevertheless, it becomes easier when you have considered certain factors beforehand for easy steering.
Patience is the key to handling any situation. This is what remarkably distinguishes the investors from the traditional traders. Investing and then waiting for money to grow over a period of time requires patience and perseverance.
The temptation to exit from the scheme is quite high, but only patience will help you sail through the down trend of the market condition.
Attaining a perfect market valuation is an arduous task overall; yet you can get hold of the same if you look into the past records closely. Before investing, you can look out for the P/E ratio of various market indices.
A closer look the past three to four quarters will give you a clear idea about the current market scenario.
The prime aim of a lump sum investment is returns. Hence, it becomes vital to assess the returns beforehand, so that you get an overview of the scheme you are opting for. It is important to know the features of your investment plans and also understand the relevant returns that your scheme is enabled to provide you.
The lump sum investment should also be able to meet your liquidity requirements. However, there should not be any considerable loss in amount. A lesser loss implies a better investment plan.