As a new participant, you always consider if starting with a SIP vs. LumpSum will be beneficial. Which will be more profitable for me, SIP or lump sum?
Table of Contents
What are Mutual Funds?
Mutual Fund is an investment scheme where people pool (invest) in money (just like other investments) and your money is invested (on your behalf) in stocks, bonds, or other securities.
It is one of the best investment avenues which can create huge wealth for its users (investors).
These investments can be used for various investment requirements such as financial goals ( retirement, child education, purchase of an asset, home, etc.), short term money parking, fixed maturity plans, regular income, tax saving, and wealth creation.
But it is very important to understand mutual funds completely before going further. Here is a complete mutual fund guide.
There are two ways to invest in mutual funds:
- Lump Sum Investment
- SIP ( Systematic Investment Plan)
What is SIP?
SIP, stands for Systematic Investment Plan. where you have to invest a fixed amount each month.People with regular stream of income can choose SIP option.
Even the SIP option is best for salaried people.
Benefits of SIP
Value cost Averaging
The best benefit of SIP is value cost averaging. Since you invest a small amount each month and thus the cost of purchase is average out.
For example suppose you invest rupees hundred each month. Based on the NAV ( price of unit), you can buy different number of units each month as given below in the table.
Ultimately if we derive the average cost than it is Rs 9.98 per unit. Thus you invest a fixed sum on fixed date, but every time different number of units are purchased.
You can notice, the price is averaged out here. Since you are entering on different market cycles each month, market risk is also reduced.
| Month | Units Purchased | Units Purchased | NAV |
| January | Rs 100/10 | 10 | 10 |
| February | Rs 100/11 | 9.09 | 11 |
| march | Rs 100/12 | 8.33 | 12 |
| April | Rs 100/8 | 12.5 | 8 |
| Average Cost | Total number of units/duration in months/year | 39.92/4= 9.98 |
Disciplined Investment
This is human nature to buy and purchase new things, when money is on our side. This way starting a SIP in the beginning of month itself, forces the person to invest in the beginning of month itself. Thus it brings a discipline in investment pattern.
It may happen you left with nothing at the end of month, but if one start in the beginning of month, money can be saved easily.
It is not a kind of torture to oneself but it’s a MIND game. Human mind works this way only.
Small Investment Amount
Unlike Lump sum investment, one have to shell out smaller token of money and thus makes it easier for a person to invest.
One can start with as little as Rs 100/500 per month. So, investors with low income can also invest.
Diversificatio
Due to low investment amount one can choose any number of schemes and diversify the portfolio.
Liquidity
Mutual Fund Lumpsum or SIP, both are very liquid investments. One can withdraw, stop, make partial withdrawal or any other transaction easily.
NOTE: ELSS and Close ended funds have certain lock in time.
SIP or lump sum which is more Profitable?
The basic difference between Lump sum and SIP is cashflow/ investment style.
While in case of lump sum, the person invests the entire sum at once and therefore the entire amount earns profit from day 1.
While in case of SIP, one invests small amounts each month and thus accumulates corpus slowly. For instance, the first month’s amount will earn a return for 12 month, the 2nd month installment will earn profit for 11 months, the 3rd month installment will earn profit for 10 months and so on.
The below two screenshots show the return difference in SIP and lump sum Investment in the same fund, same duration and same amount of investment amount.
Lum sum Vs SIP -Real life calculation, no assumptions
Here, the calculations taken for ICICI Prudential Bluechip Fund. The total amount of investment is same i.e6 lac in each case. In case of SIP, the monthly SIP amount is 10000, thus investment amount is 6 lac.
In the same time frame Lump Sum investment of Rs. 6 lac.
You can notice the accumulated amount in case of Lump sum is 11 lac and Accumulated amount in case of SIP is 8.22 lac.
This is because in SIP the amount is released slowly and thus investment get lower time to remain invested whereas in case of lump sum investment the entire amount is invested in one go.
| Investment in ICICI Prudential Bluechip Fund | Investment amount | Value after 5 years |
| Lump Sum investment | Lump sum -600000 | 11,01,429 |
| SIP Investments | SIP -10000 per month | 8,22,738 |
Few IMPORTANT facts about SIP and Lump sum investment
- Anyone can choose any way to invest.
- Both options SIP and Lump Sum can be chosen together in the same fund or different fund.
- One can start with any mode and later opt for other options.
- You can increase SIP/lumpsum investment amount any time.
- You can withdraw anytime.
- Suppose if you start a SIP of 3 k and later either you want to increase SIP or want to invest some lumpsum amount,you can do so.
which is better sip or one time investment?
From the above table please notice the rate of return. There is not much difference between in rate of return in both SIP and Lump sum investment. However, it may differ ( it depends on market conditions).
But Something to Notice
There is a difference between maturity value. ( Please refer table above).
rate of return SIP- 13%
rate of return Lump sum -12.9%
Conclusion
SIP and Lump sum both are good way to invest money in. It all depends on your cashflow and ease while investing in SIP or lump sum.
Even better, one can start both together. This way you can build wealth faster. However, If you have a constant income stream than SIP can e ore suitable to you and if income all of a sudden then lumpsum is better for you.
If as per the bank balance and monthly surplus, both can be started together, in same fund or different funds.
A point of caution here, one should follow the right strategy to invest the lump sum amount in mutual fund because of few reasons. To know more about it please read How to invest lump sum in mutual funds.
Additional Resources
Mutual Fund SIP-Systematic Investment Plan II Step By Step Guide On How To Start A Mutual Fund SIP
How To Become A Crorepati With SIP Investment 5000 Per Month
SBI Mitra SIP – A Powerful Tool To Get Monthly Income
SIP Taxation-How SIPs Are Taxed
Benefits Of Mutual Fund SIP Investment
