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WHAT IS THE DIFFERENCE BETWEEN SIP AND LUMPSUM INVESTMENT IN MUTUAL FUNDS?

Veronika 3 years ago 3 min read

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Investing in mutual funds comes with several choices for investors. Apart from choosing between the type of mutual funds, one also needs to decide on how to invest in mutual funds. Usually an investor gives all their time and efforts to the former part and leave out the latter part. However, mind you both the aspects of investing are equally important. As an investor, you can invest in mutual funds either through SIP mode of investment or lumpsum mode of investment. Let’s understand the differences between these two modes of investments and find out which is ideal mode for you.

What is SIP?

Systematic Investment Plan is a systematic and disciplined approach towards investing in mutual funds. Under this method, regular and periodic payments are made towards desired mutual fund schemes for a fixed period of time. The predetermined amount gets deducted from the investor’s bank account on a specific date at periodic intervals and is further invested in the investor’s chose investment option.

The number of units acquired through SIP investment is based on the NAV (net asset value) of the fund on a specific date. As a result, different units of the fund is acquired at different market cycles. Thus, SIP investment allows an investor to enjoy the market dips and averages the cost of the mutual fund units purchased. An investor can invest in mutual funds via SIP with an investment amount as low as Rs 100 per month. SIP investment is ideal for investors who are new to the investing world and have regular cash flow.

What is lumpsum investment?

Under this mode of investment, one-time investment is made towards mutual fund schemes. In short, an investor invests the entire investment amount in one-go. Lumpsum investment is usually ideal for experienced and seasonal investors who have surplus cash along with the expertise and knowledge about the financial markets.

This mode of investment is ideal when the valuations of the shares and market are low. It is an ideal mode of investment when the P/E (Price Earning ratio) of a particular fund is low. It helps you to benefit from the market corrections.

Difference between SIP and lumpsum investment – lumpsum vs SIP

The following table summarises the differences between SIP and lumpsum mode od investment:

Parameter	SIP	Lumpsum
No of investments	Periodic and regular	One-go
Flexibility	High	Low
Cost of investment	Lower due to rupee cost averaging	High due to one-time investment
Timing the markets	No need to time the market	An investor needs to invest during a market dip
Regular cashflows	Preferred mode of investment	Not that preferred
Surplus cash	Not that preferred	Preferred mode of investment

Which is the right investment mode?

There is no right or wrong. Both SIP and lumpsum investment has its own sets of pros and cons. You must analyse your financial goals, investment horizon, and risk profile to decide which is the right mode of investment for your portfolio. As an investor, you must consider several factors such as availability of surplus cash, regular income, fund type, market timing, etc. before deciding the right investment mode for you. Happy investing!