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Know The Difference: Systematic Investment Plan (SIP) Vs Lump sum

27 June 2022, 8:16 AM

Know The Difference: Systematic Investment Plan (SIP) Vs. Lump-Sum

With increasing inflation rates, the risk appetite of the average investors has also grown up. Therefore, mutual fund investments have been significantly on the rise. There are many investment opportunities, however, following ways of investing in mutual funds are good options for starters. There are principally 2 types of investment options in case of mutual fund investment—SIP or Systematic Investment Plan and lump sum.

What is SIP?

SIP determines periodic investments at a chosen interval for a considerable period of time as per the terms of the scheme. A lump sum investment signifies investing the entire amount available in a single shot under the chosen scheme. Before choosing and settling for any of these methods, careful consideration of the income and expenditure of the investor is required. 

It is said that the SIP mode is best suitable in case of mutual fund schemes that have high volatility return records. It depends on the investor how much interval is required between two consecutive payments. It may be monthly or yearly, the choice entirely depends upon the investor. Once the time is set, the amount will be automatically paid through digital mode.

One of the major benefits of SIP is that it ensures a disciplined investment habit. It ensures healthy long-term return benefits thus providing a secured financial base in the long run. Because of its unique rupee-cost averaging feature, it is considered to be quite a healthy mode of investment.

The continuous investment cycle greatly helps in cutting through the volatile nature of the market with ease. Whether the market rises or falls, it is benefitted by both accordingly. 

Benefits

  • Creates habitual investment discipline
  • Provides benefits of cost averaging
  • Provides the investor with better liquidity than other traditional modes of investment
  • The investor is free to select the desired investment amount

What is Lump-Sum Investment? 

Depending on the financial goal and planning, any investor with a significant amount of cash in hand can opt for lump sum investment. Despite possessing a low equity allocation, the investors can opt for a lump sum investment. Lumpsum investments experience considerable volatility in the short term scenario. 

Well-experienced and expert investors are ideal for this sort of investment. They must possess the necessary knowledge regarding the market trends along with a significant amount of cash flow.

The ideal time to do lump sum investment is when the market along with the share prices are running low. The lump-sum investment gives a coherent picture to the investor as to how much has been invested and what will be the next financial step. Careful consideration of the market trends is required in this case to ensure better returns in the long run.

Benefits

  • Better controlled investment
  • Provides the benefits of the power of compounding
  • Provides benefits of market corrections
  • Ensures better returns in the bull run

Comparative Study: SIP Vs Lump sum

While doing a comparative study of SIP and lump sum investment, it must be noticed that SIP even allows a nominal investment of INR 500 per month. However, when the monthly investment is meagre, then the return is also low. On the other hand, a lump sum investment for a long term ensures the compounding factor to strike in. The capital is enhanced either through interest or based on market appreciation. 

A market correction is an important factor in case of lumpsum investment. When the market prices are running low, it is best to invest in order to buy the maximum number of units possible. When the market rises, then there will be a considerable increase in the total value. 

In the case of lump-sum investment as the entire amount is invested at one go, then the entire value invested tastes the benefits of the entire duration of the bull market. Whereas, periodically invested SIPs, reduces the time duration thus ensuring a lower profit benefit.

Differentiating Table: SIP Vs Lump Sum

Particulars

SIP

Lump-Sum

Investment AmountLow, as low as INR 500 p.m.High, as this is a one-time investment
InvestmentSystematic/ MonthlyOne time
RiskModerateHigh
Cost of InvestmentLow due to Rupee Cost AveragingHigh as it depends on the market
Market VolatilityLow as it averages the cost on a monthly basisHigh as it depends on the market timing and volatility

Summary

Financial experts infer that the best investment strategy for wealth creation is to maintain a balanced combination of both SIPs and lump sum investments. The investor must remain static in case of a downward market without exiting the investments. While investing under low market circumstances, the investor will be able to enjoy high return benefits over a period ranging between 3 and  5 years. However, regular monitoring of the market trends and updates are essential for gaining optimum investment benefits.