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:
- What is a mutual fund?
- What is SIP?
- Benefits of SIP
- What is lump sum?
- Benefits of lump sum
- SIP vs Lump sum - Which option to choose in which situations?
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
- You can start with a small amount
- You don’t need to time the markets
- Benefit of power of compounding
|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|
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
- You can time your investment
- Lump sum investment compounds faster
SIP vs Lump sum -Which option should you choose in which market situations?
Returns generated by SIP vs lump sum in rising marketsSuppose 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|
Returns generated by SIP vs lump sum in falling marketsSuppose 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|
Summary of SIP vs 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 lineFrom 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!