SIP vs Lump sum Investments

SIP vs Lump sum – Which One Should You Choose?

When you ask an expert if SIP is better or lump sum, he would always tell you that both will work almost the same, you need to make a decision based on which option suits you the best. Well, we don’t disagree with this at all. But nobody has ever shed some light on the truth when to choose SIP and when to choose lump sum.

So, today let’s find the answer to… SIP vs Lump sum – Which option to choose in what situations?

Let’s begin. 

In this article: 

  1. What is a mutual fund?
  2. What is SIP?
  3. Benefits of SIP
  4. What is lump sum?
  5. Benefits of lump sum 
  6. SIP vs Lump sum – Which option to choose in which situations?

Before we understand what is SIP or Lump sum, we must know what is a mutual fund in the first place. 

What is a Mutual Fund?

Mutual fund is a fund pooled by multiple investors to achieve a common financial objective. So, if a group of investors wish to invest in equities, then they will invest in an equity mutual fund. If a group of investors wish to invest in debt instruments, then they will invest in a debt mutual fund. Similarly, if a group of investors wish to invest in both, equity and debt, then they will invest in a hybrid mutual fund. There are 29 types of mutual funds in India from which you can choose and invest in a fund according to your investment objective.

Recommended watch: What are mutual funds?

Now the question is, how do people with common investment objectives come together to invest in a mutual fund? 

Well, this is done when an Asset Management Company (AMC) comes up with a mutual fund scheme. Each mutual fund scheme has an investment objective. If an investor’s investment objective aligns with the scheme’s investment objective, then the investor would invest in the mutual fund scheme. 

The best part is that you don’t have to stress and research about which stocks to invest in as this job is done by expert fund managers appointed by the AMC. These fund managers are financial experts and they make financial decisions to achieve the objective of the mutual fund scheme. In exchange, they charge a small fee from the investors, known as expense ratio.

Now, when you decide to invest in a mutual fund, there are multiple decisions you have to make… Should you go for a direct or a regular plan? Or should you select growth or dividend option? Should you invest offline or online…and a lot more. But among all of these, there is one constant decision you have to make regardless of which mutual fund you choose to invest in. This decision is none other than – SIP vs lump sum.

Let’s understand what is SIP and lump sum.

What is SIP?

A systematic investment plan is commonly known as SIP. It is a way of investing in a mutual fund. SIP works with a simple principle – drop by drop fills the bucket. So, in a SIP, you invest a certain amount systematically for a certain period of time. This time frame can be daily, weekly, monthly, quarterly or half-yearly. Moreover, you can start a SIP as low as Rs. 100 in equity mutual funds.

Benefits of investing in a SIP

  • You become a disciplined saver and investor

Saving a part of your income is always a difficult task. This is because, for most of us, the more we earn, the more we spend. Hence, when we are in need of money, we often end up wondering… where did all the money go. Hence you must always save money for your future before spending. But, just saving your money isn’t going to help you fight inflation. In order to do that, you need to invest your money too. To achieve the target of saving and investing, SIP is the best available option.

A systematic investment plan allows you to invest a small amount from your income every month. So, if you set your SIP date just after you receive your pay check then you are simply saving before spending. 

  • You can start with a small amount

Just as I had mentioned at the start of the article, SIP works on the concept – drop by drop fills a bucket. Yes, you can start investing in a SIP with as low as Rs. 100 per month. So, if you are a person with a small income, you can still take advantage of the growth opportunities available in the markets. 

  • You don’t need to time the markets

You must have heard people saying that if you wish to make money in the stock markets, then you need to enter at lows and sell at highs. But, it is easier said than done. If you practically think of following this, then you might get stuck in the carousel of reading and analysing charts. So, by investing in a SIP, you get the advantage of rupee cost averaging.  

What is rupee cost averaging?

The concept of rupee cost averaging lies in averaging out the cost at which you buy units of a mutual fund. So, if the Net Asset Value (NAV) of a fund drops or if the markets are down, you get to buy more units and vice versa. So every month as more units are added to your portfolio, it averages your purchase cost and maximises returns. 

  • Benefit of power of compounding

The magic of the power of compounding has worked exponentially for great investors like Mr. Warren Buffett. This magic can work for you too if you invest consistently in a SIP for the long term. 

Power of compounding works with a simple concept… the interest that you earn is added back to the principal amount. Hence, you get interest on the principal amount as well as the interest amount. Due to this, a small sum of money can grow into a huge corpus. 

If you invest a certain sum of money every month at an interest rate of 15%, here are the returns you would make. 

SIP Amount Rate of Return Time Frame Invested Corpus Future Value
Rs. 1,000 15% 30 years Rs. 3,60,000 Rs. 70,09,821
Rs. 2,000 15% 30 years Rs. 7,20,000 Rs. 1,40,19,641
Rs. 5,000 15% 30 years Rs. 18,00,000 Rs. 3,50,49,103
Rs. 10,000 15% 30 years Rs. 36,00,000 Rs. 7,00,98,206

So, if you had started a SIP with Rs. 1,000 per month for the next 30 years, then you could have an accumulated corpus of Rs. 70 lakhs on a mere investment of Rs. 3.6 lakhs. 

On the other hand, if you have a higher investing threshold, then you can invest Rs. 10,000 and accumulate an investment corpus of Rs. 7 Crores on a mere investment of Rs. 36 lakhs. 

This is how the magic of compounding works on your investments. 

Recommended watch: How to make the magic of compounding work on your investments?

Now, let’s talk about the other way of investing in mutual funds… lump sum investing. 

What is lump sum?

Lump sum is another way of investing in mutual funds. Opposite to SIP, in lump sum, you invest a bulk amount at a time and buy units at a particular price.

Benefits of lump sum investment

  • One-time investment

In a lump sum investment, you invest a bulk amount in one go. Post investing you can sit back and let your money grow for the long term. Moreover, when the market is in a growth phase as is the case between 2017 and 2021, the value of the lump sum investment grows exponentially as compared to SIPs. 

  • You can time your investment

If you are someone who closely tracks the markets, then a lump sum mode of investing can work wonders for you. You can invest a lump sum amount near the support levels and make money as the market bounces back. A lump sum mode of investing gives you the freedom to select the levels you wish to invest in… unlike SIP which invests your money even if the markets are at an all-time high. 

  • Lump sum investment compounds faster 

Ideally, you can take the advantage of the power of compounding in both SIP and lump sum. But, in a SIP as you invest a small amount every month, the time which your first SIP gets to compound is the highest while the last SIP gets the smallest time to compound. Hence, if you take a hypothetical example where the market is constantly in an uptrend then your lump sum investment would outperform SIP in the long term. 

So, now the question is…SIP vs lump sum – in which market situations should you choose SIP and in which should you choose lump sum. Let’s find out. 

SIP vs Lump sum –

Which option should you choose in which market situations?

Returns generated by SIP vs lump sum in rising markets

Suppose you had invested Rs. 10,000 every month in Aditya Birla Sun Life Frontline Equity Fund for four years from 2016-2020. As during this duration, the markets were in a bullish phase, here is how your SIP would perform. 

Month  SIP amount  NAV (in Rs.) Units allotted
01-01-2016 Rs. 10,000 159.44 63
01-02-2016 Rs. 10,000 151.99 66
01-03-2016 Rs. 10,000 145.39 69
01-04-2016 Rs. 10,000 155.46 64
01-05-2016 Rs. 10,000 158.26 63
01-06-2016 Rs. 10,000 164.98 61
01-07-2016 Rs. 10,000 170.69 59
01-08-2016 Rs. 10,000 179.11 56
01-09-2016 Rs. 10,000 183.17 55
01-10-2016 Rs. 10,000 184.14 54
01-11-2016 Rs. 10,000 182.84 55
01-12-2016 Rs. 10,000 171.21 58
01-01-2017 Rs. 10,000 170.82 59
01-02-2017 Rs. 10,000 182.46 55
01-03-2017 Rs. 10,000 187.29 53
01-04-2017 Rs. 10,000 194.12 52
01-05-2017 Rs. 10,000 197.78 51
01-06-2017 Rs. 10,000 200.4 50
01-07-2017 Rs. 10,000 203.15 49
01-08-2017 Rs. 10,000 212.71 47
01-09-2017 Rs. 10,000 212.52 47
01-10-2017 Rs. 10,000 209.72 48
01-11-2017 Rs. 10,000 219.48 46
01-12-2017 Rs. 10,000 212.91 47
01-01-2018 Rs. 10,000 221.29 45
01-02-2018 Rs. 10,000 226.58 44
01-03-2018 Rs. 10,000 214.87 47
01-04-2018 Rs. 10,000 210.87 47
01-05-2018 Rs. 10,000 219.12 46
01-06-2018 Rs. 10,000 215.91 46
01-07-2018 Rs. 10,000 212.88 47
01-08-2018 Rs. 10,000 224.49 45
01-09-2018 Rs. 10,000 229.67 44
01-10-2018 Rs. 10,000 214.17 47
01-11-2018 Rs. 10,000 207.09 48
01-12-2018 Rs. 10,000 215.16 46
01-01-2019 Rs. 10,000 216.78 46
01-02-2019 Rs. 10,000 212.24 47
01-03-2019 Rs. 10,000 212.35 47
01-04-2019 Rs. 10,000 227.51 44
01-05-2019 Rs. 10,000 225.16 44
01-06-2019 Rs. 10,000 232.02 43
01-07-2019 Rs. 10,000 228.45 44
01-08-2019 Rs. 10,000 213.05 47
01-09-2019 Rs. 10,000 208.93 48
01-10-2019 Rs. 10,000 218.02 46
01-11-2019 Rs. 10,000 228.46 44
01-12-2019 Rs. 10,000 231.64 43
01-01-2020 Rs. 10,000 233.06 43
01-02-2020 Rs. 10,000 231.08 43
01-03-2020 Rs. 10,000 216.18 46
01-04-2020 Rs. 10,000 165.05 61
01-05-2020 Rs. 10,000 188.2 53
01-06-2020 Rs. 10,000 188.02 53
01-07-2020 Rs. 10,000 198.86 50
01-08-2020 Rs. 10,000 207.9 48
01-09-2020 Rs. 10,000 219.3 46
01-10-2020 Rs. 10,000 216.95 46
01-11-2020 Rs. 10,000 222.13 45
01-12-2020 Rs. 10,000 249.59 40
Total  Rs. 6,00,000 2994

So, the total amount invested through SIP is Rs. 6,00,000 and the total units allotted to you in this time frame are 2,994. If you were to sell these units on 1st December 2020 at a NAV of Rs. 249.59 then, the total accumulated corpus would be Rs. 7,47,152 that is an absolute return of 25% on the invested amount. 

Now, if during the same time frame you would invest a lump sum amount of Rs. 6,00,000 on 1st January 2016 at an NAV of 159.44, you would get 3,763 units of the mutual fund scheme. If you sell all the units on 1st December 2020 at an NAV of 249.59, then you would receive an accumulated corpus of Rs. 9,39,250, that is an absolute return of 57%

This difference of 32% in the accumulated corpus is because in an SIP, your first SIP amount of Rs. 10,000 had three years and eleven months to compound. Whereas, the last SIP of Rs. 10,000 had only one month to compound. On the other hand, in a lump sum investment, your invested amount of Rs. 6,00,000 had the entire four years to compound.  

From this example we can conclude that, lump sum investment works best in a rising market than an SIP. 

Returns generated by SIP vs lump sum in falling markets

Suppose you had invested Rs. 10,000 in Aditya Birla Sun Life Frontline Equity Fund from 1st January 2008 to 1st December 2011. During this duration the markets were in a bearish phase. So, here is how your SIP would perform. 

Month  SIP amount  NAV (in Rs. ) Units allotted
01-Jan-08 Rs. 10,000 82.13 122
01-Feb-08 Rs. 10,000 69.08 145
03-Mar-08 Rs. 10,000 65.8 152
01-Apr-08 Rs. 10,000 61.27 163
02-May-08 Rs. 10,000 67.63 148
02-Jun-08 Rs. 10,000 62.01 161
01-Jul-08 Rs. 10,000 51.11 196
01-Aug-08 Rs. 10,000 56.56 177
01-Sep-08 Rs. 10,000 56.82 176
01-Oct-08 Rs. 10,000 52.29 191
03-Nov-08 Rs. 10,000 42.53 235
01-Dec-08 Rs. 10,000 38.16 262
01-Jan-09 Rs. 10,000 42.85 233
02-Feb-09 Rs. 10,000 39.63 252
02-Mar-09 Rs. 10,000 37.86 264
01-Apr-09 Rs. 10,000 41.98 238
04-May-09 Rs. 10,000 50.18 199
01-Jun-09 Rs. 10,000 63.88 157
01-Jul-09 Rs. 10,000 63.13 158
03-Aug-09 Rs. 10,000 68.85 145
01-Sep-09 Rs. 10,000 68.65 146
01-Oct-09 Rs. 10,000 74.82 134
03-Nov-09 Rs. 10,000 70.15 143
01-Dec-09 Rs. 10,000 78.35 128
04-Jan-10 Rs. 10,000 80.59 124
01-Feb-10 Rs. 10,000 76.78 130
02-Mar-10 Rs. 10,000 77.72 129
01-Apr-10 Rs. 10,000 81.5 123
03-May-10 Rs. 10,000 81.96 122
01-Jun-10 Rs. 10,000 78.17 128
01-Jul-10 Rs. 10,000 82.12 122
02-Aug-10 Rs. 10,000 85.65 117
01-Sep-10 Rs. 10,000 87.1 115
01-Oct-10 Rs. 10,000 95.12 105
01-Nov-10 Rs. 10,000 95.45 105
01-Dec-10 Rs. 10,000 93.56 107
03-Jan-11 Rs. 10,000 95.16 105
01-Feb-11 Rs. 10,000 85.14 117
01-Mar-11 Rs. 10,000 85.41 117
01-Apr-11 Rs. 10,000 89.84 111
02-May-11 Rs. 10,000 88.72 113
01-Jun-11 Rs. 10,000 87.6 114
01-Jul-11 Rs. 10,000 88.24 113
01-Aug-11 Rs. 10,000 87.05 115
02-Sep-11 Rs. 10,000 80.07 125
03-Oct-11 Rs. 10,000 77.38 129
01-Nov-11 Rs. 10,000 82.13 122
01-Dec-11 Rs. 10,000 77.73 129
 Total Rs. 4,80,000   7,161

The total amount invested was Rs. 4,80,000 in which 7,161 units of the fund were allotted to you. If you would sell the entire units on 1st December 2011 at an NAV of 77.73, your accumulated corpus would be Rs. 5,56,626 which is an absolute return of 16%. 

Let’s assume you had invested the entire Rs. 4,80,000 lump sum in Aditya Birla Sun Life Frontline Equity Fund at an NAV of Rs. 82.13 on 1st January 2008. You would receive 5,844 units. On 1st December 2011 if you would sell your investment at an NAV if 77.73, your accumulated corpus would be Rs. 4,54,285 which is a return of -5%. 

So, if we compare both SIP and lump sum in falling markets then SIP has performed better than a lump sum investment.  

Summary of SIP vs Lump sum 

Parameter SIP Lump sum
Cash outflow Regular (weekly, monthly or quarterly) One time
Rising Markets Less Preference More Preference
Falling Markets More Preference Less Preference
Risk appetite Low to moderate Moderate to high
Ability to Time the Market Preferred for people who are not skilled in timing the market.  Preferred for people who think they can time the market.
Recommended when  you have Limited but regular source of income. A large sum of money to invest. 

Bottom line

From the example we saw above, it is safe to say that SIPs perform well in falling markets and lump sum investment perform well in rising markets. 

Now that you know when to select lump sum and when to select SIP, the next question you might have is which mutual fund should you choose? With over 2,500 mutual fund schemes in the markets, you will have a hard time selecting the right one for you. 

Don’t worry, you don’t have to sit and research. We have made investing in mutual funds a lot simpler for you through our platform RankMF

RankMF is India’s best mutual fund investing platform which truly delivers its promise and tells you which is the sahi mutual fund. This data is analysed on a real-time basis with a proprietary engine that evaluates more than 20 million data points daily!

So, there you go. To invest in mutual fund, simply open a RankMF account today! 

Happy Investing

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