Equirus Wealth
13 Jan 2023 • 6 min read
Think mutual fund investments, and you will come across two investment modes – SIPs and lump sum. While both modes help you invest in the chosen scheme, they are very different from one another.
According to reports, the popularity of SIPs is increasing by leaps and bounds. In October 2022, lump sum investment in hybrid and equity mutual funds was reduced to Rs.17,900 crores. On the other hand,
SIP investments increased to Rs.13,000 crores and broke records. Moreover, according to the latest AMFI data, there are more than 6.05 crore SIP accounts in mutual fund schemes.
While SIPs are rising in popularity, lump sum investments are also favored by many. So which one is good for you?
Let’s understand –
Lump sum investment means investing a single amount into a mutual fund scheme at a given time. You invest once and have no obligation to repeat the investment.
SIP stands for Systematic Investment Plan. It is the process of investing in small amounts regularly. So, while you invest only once in a lump sum mode, you invest multiple times through SIP. When you pick the SIP mode of investing, you have to choose the –
Once the SIP starts, the chosen amount is deducted from the bank account automatically at the chosen frequency. The amount is then allocated to the selected mutual fund scheme.
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Both lump sum and SIP investment modes have their respective pros and cons. Let’s assess –
Lump sum investment:
Pros | Cons |
---|---|
• You have to invest only once. | • You have to time the market |
• You can invest any amount. | • Your investment is not disciplined |
• Suitable for those who want to invest a considerable amount into a scheme. | • You might not be able to save enough for a lump sum investment |
• You start earning a return on the total amount that you have invested. | • You might not be able to save much. |
SIP:
SIP investments score brownie points on major factors. These factors are discussed below –
The primary benefit that SIPs give is rupee-cost averaging. Since your investment is spread out across the tenor with investments scheduled at regular intervals, the effective Net Asset Value (NAV) of the purchase price per unit of the fund is averaged out. Let’s understand with a simple example.
Say you start a SIPstart a SIP on 1st January and then invest Rs.1000 every month. The NAV at different months is as follows –
Date | NAV | Units bought (Rs.1000/NAV) |
---|---|---|
1st January | Rs.10 | 100 |
1st February | Rs.9.80 | 102.04 |
1st March | Rs.9.90 | 101.01 |
1st April | Rs.10.05 | 99.50 |
1st May | Rs.10.10 | 99.01 |
1st June | Rs.10.08 | 99.21 |
1st July | Rs.10 | 100 |
1st August | Rs.9.90 | 101.01 |
1st September | Rs.10.20 | 98.04 |
1st October | Rs.10.25 | 97.56 |
1st November | Rs.10.28 | 97.28 |
1st December | Rs.10.35 | 96.62 |
Total | 1191.64 |
You invested Rs.12,000 and managed to buy 1191.64 units through SIPs at an average NAV of Rs.10.07 even though the market fluctuated during the tenure.
This is how rupee-cost averaging works. Irrespective of market movements, your investment continues, and the purchase cost gets averaged out over the installments so that you don’t make a loss if the market falls after you have invested.
When you invest in a lump sum, especially in equity, you need to wait for the perfect time to enter the market so that you can enjoy maximum returns on investment. This timing of the market is not possible for every investor as it requires immense knowledge, expertise, and experience. Moreover, in the bid to wait for the right time, you might delay your investment, thus missing out on the returns.
With SIPs, this hassle of timing the market is gone. With rupee-cost averaging and regular investment, you don’t have to wait for the right time to enter the market. Even if the market falls, your SIP will continue buying units and accumulating them so that when the market rises, you can make a profit on the units bought. SIPs are, thus, automated investments that take out the factor of timing the market from the equation and make every time the right time.
Investing in SIPs is affordable. The minimum investment usually starts from Rs.500 per month. Thus, even small investors can afford to invest in mutual fund schemes through affordable investment amounts.
Furthermore, with regular investing, SIPs help you save in a disciplined manner. You can save every month and build up a considerable corpus for your financial needs in a disciplined manner.
SIPs also help in building up a saving habit so that you can save for your financial goals. You don’t feel the pocket pinch and yet save up a corpus for your needs.
There are no potential drawbacks to SIPs as they help you invest in a systematic way.
SIPs are suitable for all. They can help you invest in small amounts and still amass a sizeable corpus over time. Regarding lump sum, if you have surplus funds at your disposal and want to invest once, you can opt for lump sum investment too but not at the cost of SIPs.
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So, build your portfolio with SIPs and lump sum too, and create funds for your financial goals.
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