SIP vs Lumpsum? Differences and Benefits:
What is SIP?
SIP, when expanded, means Systematic Investment Plans. These are plans designed specifically for the middle and lower-income groups of the population who cannot invest a large sum of money at once.
This type of scheme allows the investor to shed only tiny portions of their income towards investments that have to be systematic, i.e., regular monthly payments. The total investment grows gradually as you invest over time with more installments. The growth of the asset you have invested in starts to show profits.
SIP investments are meant to be carried on for long terms to create a substantial savings amount that the investor can use at the time of need. SIP returns are generally slightly lower than a similar amount invested in lumpsum.
This is because the lump sum amount grows as a whole through the entire investment period. The longer a sum of money has stayed invested, the better chances it has of reaping good returns.
The SIP amount is calculated by dividing the total amount you wish to invest by the number of installments you plan to make to complete the total amount invested.
What is Lump Sum?
Lumpsum Investment is a form of investment where the investor shells out an amount of money, usually a large amount, which is then invested all at once and allowed to grow periodically over time.
The entire sum of money is invested at once. There is no obligation for the investor to invest money every month. You can invest the lump sum amount whenever and invest it suitably by checking good entry points for investment.
The lumpsum calculator gives the annual returns that the investment would have fetched if you had invested a certain amount one year ago into the same mutual fund.
SIP vs Lumpsum:
Monitoring the market:
SIP investments are an excellent method to monitor the market. Since the amount of investment made by the investor increases slowly over time, there is enough time for you to examine the markets and your investment decision and make suitable changes along the way. There is usually no need to withdraw investment from a scheme if you believe it yields lesser returns but starts investing in another from the next month.
The lumpsum plan allows the investor to monitor the market more intently as your entire capital is invested at once. You will have to withdraw it as soon as possible if you believe the scheme is underperforming and re-allocate the amount.
Flexibility:
The flexibility offered by Lumpsum and SIP investments varies on periods between assets. SIP provides more flexibility by allowing the investor to change the amount of investment you choose to make every month and the core decision to change the investment decision.
It increases the weightage of your investment very gradually. On the other hand, lumpsum investment offers less flexibility if you wish to reduce the size of or change the fund or scheme of the investment. There will be many processing fees and taxes apart from the time taken for funds allotment. Lumpsum investments are hence less flexible.
Market Volatility
Market volatility tends to impact investments significantly. SIP investments are less exposed to the adverse effects of volatility than lumpsum investments. Since lumpsum investments are in the market all at once to fetch greater absolute returns, it also calls for greater risk exposure. SIP investments go through periods of high and low volatility and average out its effects to mitigate extremes of risk and returns.
Benefits of SIP Over Lump Sum
- Reduced risk exposure
- Low upfront investment amounts
- Low exposure to market volatility
- Greater flexibility
Benefits of Lump Sum Over SIP
- Greater expected returns
- Benefits of the time value of money
- Savings Taxation and processing fee
SIP Vs Lumpsum: Which is Better?
If you are an investor with a low income and cannot spare large sums of money at once, the better and safer option is to go for SIP. It is also better if you are a risk-averse person or not appropriately knowledgeable about the stock market. SIP would be a better option.
However, it is generally observed that people with a good hold over the market prefer Lumpsum as it offers them to reap greater profits and avoid hefty processing fees due to the investment made in small chunks.
Conclusion
A person should not try to aim for a particular benefit of SIP or Lumpsum to decide which one they should go for. Kindly analyse the reasons for people who employ SIP investments or Lumpsum investments. This method is bound to give you more efficient returns and satisfaction.
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