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What gives better returns - SIP or Lumpsum?

I am investing through both SIP and Lumpsum on Groww. Now I want to invest more money. Should I invest through SIP or Lumpsum? What will give me more returns?

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6 Approved Answers

aniket

The difference between the two is in the terms of the cash flows, in case of lump sum investing, the investor has money on hand that can be invested, whereas in case of SIP, the investor may not have lump sum on hand but a regular surplus expected in future.

The suitability of the two schemes depends on the investor. SIP is better for those having a regular surplus expected in future whereas lump sum schemes would be better for those having larger amounts with them at a given point and that can be locked in for a certain period.

If a lump sum amount can be arranged which won’t be required in the near future, lump sum scheme would be better as that would mean a longer period for which the entire amount is invested as against an SIP scheme where some amount is invested for longer period and some for a shorter one. The returns tend to be more for a lump sum scheme.

But the lump sum scheme can be opted for only when there is access to that sort of amount and it can be locked in for that long a period. In case of people with regular surplus expected in the future, one can go with the SIP schemes. They can be good for people with smaller amounts which are recurring in nature.

Thus, there is no absolute answer to which is better. It all depends on the investor, the sort of cash flows he has and the period for which the amount can be locked in. 

Ankit

Investing in Mutual Funds via SIP and lumpsum are both good strategies for investment.

Investment via lumpsum mode provides higher returns as compared to SIP. This is because lumpsum gives more time for investment and thus the money grows faster because of the power of compounding.

Investment via SIP mode will give comparatively less returns as compared to lumpsum. Investments via SIP mode will be made when the market will be at higher level as well as lower level and so the investor will get weighted average of all the investments made over a period of time.

An investor having INR 100 for 10 years will stay invested for the entire period of 10 years. But in case of SIP if INR 10 is invested every year for 10 years, then first installment of INR 10 will be invested for 10 years, next installment for 9 years and so on. So here the growth is less.

Both the modes have their own benefits. A person having lumpsum amount but would not like to make a lumpsum investment into equity oriented fund can invest the entire amount in a liquid fund, and can gradually transfer a fixed amount over a period of time through STP (Systematic Transfer Plan) to the fund of his choice. This will give him the advantage of averaging out the investments by making lumpsum investment. Moreover his cash will not stay idle and will be getting a fixed return in liquid fund.

An investor should also keep in mind the availability of funds while deciding the mode of making investments. 

Kavita Soni

SIP – Invest the total amount in parts and with time intervals

Lumpsum - Invest the total amount in one go

Now if you consider the same amount being invested in both the schemes and at the same rate of interest of course, then which one will yield better returns?

Let’s say the amount is : ₹12,000

Rate of interest is 5%

Assumptions:

  • NAV of funds in which you have invested remains constant
  • Interest is compounded quarterly
  • Amount in SIP is invested in 4 halves (3000 every quarter)

Lumpsum amount received at the end of year: ₹12989 approximately

SIP amount received at the end of the year ₹12389 approximately

These calculations are quite simple. 

Use SIP Calculator and Lumpsum Calculator to calculate returns for your scheme. 

Here we see that for same principal and same NAV throughout the year, lumpsum will give more returns. Reason: The average time period for investment in lumpsum is greater than SIP i.e. you are giving more time to your investments to yield better returns.

Now there is a catch in this. What will be the scenario if NAV lowers down in each quarter? In that case, SIP will yield more returns at the end of the year because every quarter you will be able to buy more units with less cost of money and ultimately higher returns.

The third scenario is NAV prices keep increasing every quarter. Hence with SIP the cost of investment goes higher and you buy less units every quarter which will ultimately lead to lower returns as compared to lumpsum (fixed investment at one time) at the end of the year.

Hence the major points of consideration for two schemes are:

  • Frequency of investment
  • Falling NAV or rising NAV

Lumpsum investments help you when the market you are investing in growing continuously.

SIPs will help you more when prices or NAV is falling for a particular investment.

Devanshu

The return you get on an investment is purely a function of the performance of the scheme you have invested in. SIP and Lump sum are two methods of investing in a scheme.

Traditionally, over the years investors have followed the lump sum method of investing money in mutual funds. But in the recent times investors are increasingly shifting to SIP method of investing due to its added advantages over the lump sum method.

 Benefits of investing through SIP method:

·     Rupee cost averaging – under the SIP method, each month a fixed amount is invested in the scheme at the NAV rate of that particular day, as a result if the markets are high during that day and markets are low at the next SIP date, the total investment purchase price get averaged out thus increasing the potential for higher returns.

·     Reduced financial burden – when an investor invests the entire amount in one go, there is substantial reduction in the savings and thus investor may have to curtail his or her expenses but investing through SIP help to divide the investment over a period of time so that the investor can invest a small part from his/her income every month without feeling any significant financial burden.

Also, SIP can be stopped, increased, reduced or modified in any way at any point of time as per the investor’s convenience and is therefore highly flexible.

To read more about SIP, please click here 

You can read more about SIP vs Lump Sum on our blog

Arpit Chandak

As Lumpsum investment requires more time and higher amount to invest, the returns are relatively higher in comparison to SIP investments. However, higher returns are accompanied with higher risks.

SIP:

  • SIP is a systematic way of investing your money in mutual funds. You can invest every month or quarter or year, it depends on the plan you have chosen.  It encourages investors to save money and in the end, they can redeem better returns.
  • The main advantage of SIP is that investors don’t have time to keep an eye on market and hence can pour in money into SIP.
  • In SIP, one can also get the benefits of compounding i.e., you can reinvest the interest earned from the SIP. In the long run, it can make a huge positive impact on your returns.

Lumpsum:

  • A lump sum amount is a single complete sum of money. In this type of investment, you are investing the total amount at one go before the start of the investment period. This category is referred to as Lump sum mutual fund investment.
  • If market grows continuously in future, these investments can provide higher returns whereas SIP protects investors from market volatility.

Should I invest through SIP or Lumpsum:

Investors should not give much time in taking decision of whether to invest in SIP or lump sum. Whether one opts for SIP or Lump sum depends on whether you have lump sum amount to invest in one go or not. In terms of returns, the higher the investment amount the better is for the investor. The more time you give to the investment, higher the amount accumulated due to effect of compounding.

Vaneet

SIP- Systematic investment plan (SIP) is a method of investing in which a certain amount of your cash is invested periodically into mutual funds. The certain amount is decided by the user and as per the scheme of the mutual fund. Usually the mutual fund has the least amount that an investor can invest in SIP defined.

Advantages of SIP are:

  • Investment discipline
  • Mitigation of risk
  • Hassle free
  • Flexibility

Lump sum investment on the other hand is a method of investment in which the investor invests the total money that he has kept for investment purposes in one go even before the start of investment period.

Advantages of Lump sum are:

  • Investment of big amount
  • Ideal for long term
  • Convenient one time payment

Which is better?

  • Before deciding which investment method to go for, one needs to see how much money a person can invest. If an investor has a regular income and is able to save some money, he can choose to invest in SIP. Else if an investor has a large sum of money, he can go for lump sum investment.
  • Two factors are important when investing: the amount of money invested and the duration of investment. The more the money invested for longer duration, the better it is, that is, higher the return
  • In SIP, you buy more when the market is down, and buy less when the market is good. and as a result you get a weighted average return over time
  • If the market grows continuously into the future, lump sum investment gives greater returns as compared to SIP. However in a volatile market, SIP is a safe investment.

Thus with lump sum investment, an investor is exposing himself to the vagaries of the market, as there is always a chance of mistiming the market. This risk is reduced with SIPs, because of investment discipline and it helps in averaging the cost without timing the market.

For more information, please click here

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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