Mutual funds are a popular investment option in India today, with an increasing number of people using them to grow their wealth. Investing in mutual funds is easy and offers the benefits of a diversified portfolio, expert money management, and various tax benefits.
If you have a large sum of money, you can invest the lump sum in your preferred scheme. On the other hand, SIP (Systematic Investment Plan) allows you to invest small amounts over a long time.
The following sections will compare SIP vs lump sum investment in more detail.
What Is SIP?
A Systematic Investment Plan means you periodically allocating small amounts of money to your preferred mutual fund scheme. SIPs allow you to invest as little as Rs. 500 in installments weekly, monthly, quarterly, semi-annual or annual. So, if you have small but regular amounts to invest, SIP would be your preferred investment option.
When you invest via a SIP, a fixed amount will be deducted from your bank account at regular intervals on a given date. You can skip, start or terminate the SIP at any time. SIPs will stop when there is not enough money in your account, but there is no penalty for continuing it again.
One of the main benefits of investing via a SIP is rupee cost averaging. With SIPs, you can purchase more units when the markets are down and fewer units when they are up. As a result, you can invest more during falling markets and realize more gains during surging markets.
What Is a Lump Sum Investment?
In the case of a lump sum investment, you can allocate all your available funds in one go to purchase as many units as you can buy. If you have Rs. 1,00,000 and know how to choose the right mutual funds, you can go for this investment method. The minimum investment amount for lump sum is Rs. 1,000.
Lump sum investments are preferable when mutual funds’ NAV (Net Asset Value) is low. This allows you to purchase more units, while a higher NAV reduces the number of units you can purchase. When comparing SIP and lump sum investments, one can find that the latter offers more flexibility, affordability, and fewer risks.
There is always a risk of losing a substantial amount during market downturns with lump-sum investments. That is why you need high-risk tolerance, substantial disposable income and financial knowledge to succeed with lump sum investments.
What Are the Differences between SIP and Lump Sum Investments?
The following table lists the main differences between the SIP vs lump sum
| Parameters | SIP | Lump Sum |
| Purpose | For investing small sums regularly over time | For investing substantial sums in one go |
| Required risk appetite | Lower than lump sum investments | Higher than SIPs |
| Cost of investment | Low due to rupee cost averaging. This reduces investment costs by spreading it over a long time. | High due to a large one-time investment |
| Flexibility | High, you can start, stop or pause a SIP at any time. | Lower than SIP |
| Minimum investment amount | You can start investing with only Rs. 100/month | At least Rs. 1,000; Rs. 5,000 for most fund houses |
| Suitability in a continuously growing market | Less suitable | More suitable |
| Response to market volatility | Less reactive | Highly reactive |
| Suitability in falling markets | More suitable | Less suitable |
| Suitability for investors earning irregular income | Less suitable | More suitable |
SIP vs Lump Sum: Which is the Better Investment Method?
Both SIP vs lump sum investments come with their own pros and cons. SIPs are popular investment methods due to their multiple benefits like lower costs, compounding benefits, market volatility resistance, etc. SIPs can help you overcome market fluctuations without having to time the markets.
SIP investment suits most investors as it reduces their burden of investing a large amount. Unlike the lump sum method, SIPs work in both rising and falling markets. This lets you purchase more units during market downturns and benefit from high growth rates during uptrends.
However, lump sum investments come with some benefits as well. You only have to make a one-time investment and not face the hassles of regular payments. It is also well-suited for investors without a fixed income. Moreover, the lump sum route is a suitable option for individuals with a long term investment horizon.
Pro Tip: Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
Final Word
The main difference between SIP vs lump sum is that the former involves investing small amounts over time while the latter is for a one-time investment. You will want to understand their differences and pick an investment route based on your income, financial situation, investment goals, etc.
Frequently Asked Questions
-
How can you start a SIP for a mutual fund?
Once you have selected a specific mutual fund, you can start investing via SIP. To do this, you have to follow the given steps:
Step 1: Log in to the official website of an AMC of your choice.
Step 2: Complete the KYC verification process by providing the necessary documents.
Step 3: Link your bank account and transfer funds.
Step 4: Set up a SIP account by filling out the ‘Start an SIP’ form.
Step 5: Send an ECS (Electronic Clearing Service) mandate to your bank to deposit a certain amount on the same date every month.
-
Can you transfer funds from one mutual fund scheme to another?
You can use STP (Systematic Transfer Plan) to shift your assets from one mutual fund scheme to another. You can use this option to change your portfolio composition over time. For example, you can keep your money in debt funds that offer higher returns than savings deposits. When the market improves, you can shift your funds to equity schemes for more gains.
-
What is the difference between SIP and SWP for mutual funds?
While SIP is a systematic approach to investing in mutual funds over time, SWP is meant for withdrawing funds. SWP involves withdrawing a fixed amount at regular monthly, weekly, quarterly, or yearly intervals. Investors who need regular cash from their mutual fund investment, such as senior citizens, can opt for SWP. In contrast, SIP is meant for those just starting their investment journey.
-
What will happen if you miss an installment of your SIP?
Your SIP will stop only when you do not have the minimum amount required in our bank account for paying an installment. Missing a single SIP installment does not lead to any penalty or cancellation of SIPs. However, if you miss three installments, the SIP will be automatically canceled. Moreover, the bank could charge a penalty for missing a SIP. You can avoid the penalty and cancellation by pausing the SIP when you cannot pay the installment.
-
How can you stop your SIP?
To stop a SIP, you need to send a stop request to the AMC to stop a SIP. Sign in to the official portal of the AMC and submit the SIP stop request form. Alternatively, you can visit the nearest branch of the AMC and fill up the cancellation form. The SIP will stop within 30 days of your request.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Check out all our “Investor Education Originals” videos on Youtube and get smart about investing.
Start investing through a platform that brings goal planning and investing to your fingertips. Visit Kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
#MutualFundSahiHai #KuveraSabs
