Should you pick SIP or lump sum option in mutual funds?

An SIP (systematic investment plan) or a lump sum? This is one of the most common questions that many investors tend to have. Lumpsum mutual fund investment is where you invest the whole investible amount in one go while an SIP investment requires you to periodically invest your investible amount.

Below is a brief discussion on SIP mutual fund and lumpsum investment to allow you to better understand both mutual fund terms.

SIP investments

The SIP route is a mode to invest a predetermined amount in a mutual fund at regular intervals, say monthly, quarterly, or half-yearly irrespective of the market condition in a staggered way. With an SIP, you can begin your mutual fund investment with as low as Rs 500. So, an SIP is an ideal way to get market exposure at an early earning stage and benefit from the compounding effect. By investing a small investible amount through an SIP in a mutual fund for a long time period, you can considerably build a huge corpus. For instance, just by investing a small investible amount of Rs 2,000 every month for an investment duration of 30 years at an expected return rate of 14 per cent per annum in a mutual fund through an SIP, you can accumulate a total corpus of Rs 1.1 crore by the end of the investment tenure.

Lumpsum investment

Lumpsum investment is a mode to invest one time in any mutual funds of your choice. This is opposed to disseminating your investible fund over time in small instalments periodically as in the case of SIP investment. In the case of lumpsum investment, you must study the market movements well and accordingly invest to protect your capital from generating loss over time. It is usually recommended not to opt for the lumpsum investment route in mutual funds during a bullish market phase as it can result in considerable portfolio devaluation over time. Instead, you must wait for a suitable market condition i.e., the bearish phase when valuations are low. So, lumpsum investment in a mutual fund is best suited for experienced market players with considerable disposable amounts and higher risk tolerance levels.

Comparative analysis between SIP and lumpsum investment –

Frequency

Investment frequency is the basic difference between both investment modes. As mentioned above, SIP investment permits you to invest in distinct mutual fund types periodically i.e., monthly, quarterly, six-monthly, etc. On the contrary, lumpsum investment allows you to make a one-time investment in bulk in any mutual fund scheme of your choice.

Minimal investible amount

Through an SIP, you can begin with your mutual fund investment with as low as Rs 500. But for lumpsum investment, it is a must for you to at least invest Rs 5,000 initially in a mutual fund scheme. Further, you can top up the same scheme with a minimum amount of as low as Rs 1,000. Thus, if you earn a low but constant income, then SIP mutual fund is the best option for you. However, if you are an experienced investor with a high investible fund, then lumpsum mode is an appropriate investment route.

Market timing

As in the case of the lumpsum mode you require making a bulk amount investment, you must understand themarket well before doing so. This mode can be advantageous for you if you make an investment during the falling market condition. But in the case of an SIP, as the deduction of investible funds happens periodically, you can enter the market at any time regardless of the market condition. However, while an SIP endows you the opportunity to face distinct market cycles eliminating the requirement for timing your investments, you must ensure to remain invested in a mutual fund through an SIP for a long time period for at least 5-7 years. Only if you remain invested for a long time period, you can gain the benefit of compounding and generate a huge corpus.

Rupee cost averaging

In an SIP investment, the cost per unit of funds is averaged over time. During bearish market phase, a higher number of quality units in mutual funds are bought, which makes up for the purchases in rising market conditions. Such purchases in the SIP mode throughout the market conditions help to balance out the purchasing cost incurred in mutual funds. Further, you can redeem your purchased mutual fund units whenever the market performs well. As in the case of lump sum investment, only one-time investment is allowed, which means you cannot gain the benefit of rupee cost averaging here.

Which option is better – SIP or lumpsum investment?

SIP investment is a recommended investment route as it endows financial discipline, ensures the rupee cost averaging feature, allows flexibility in mutual fund investment, and helps you generate a higher corpus through the compounding effect. However, in the scenario of bearish market conditions, opting for lumpsum mode is a prudent choice because it allows you to buy higher fund units at a lower value. Further, when the market recoups, you may liquidate your lumpsum investment and earn good profit.