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SIP vs Lumpsum Investment - Which mode is better?

By Aayush Upadhyay

1st Apr 2022

4 mins read

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“Kal se roz gym jaunga”

Chanting this golden philosophy in mind, protein shaker in one hand and duffel bag in another, you reach the gym only to realise that there are several options available for the membership.

The instructor presents three plans; ₹500 for a month, ₹1200 for three, and ₹4500 for a year. Of course, the yearly membership is lucrative, and most of us would go for the hefty ₹1500 discount, but this determination is put to the test only after the body is crying for mercy post the first day's workout. The markets, too, work similarly, and so does the "Psychology of Money."

To understand these memberships, oops, modes of investments better, let’s look at this blog.

SIPs

We've all had those piggy banks, heavy with our consistent investment of one rupee coins over the years, haven't we? SIP is a similar concept… a systematic way of small assets accumulating over time in a piggy bank called the stock market. Let us look at the advantages SIP brings along.

Benefits of SIP

  • Inculcates a discipline of investing

SIPs enable us to invest a small amount of money regularly, an amount that would otherwise be non-consequential to our day-to-day lifestyle, now ensures that a good corpus is created for future expected and unexpected expenses.

  • Risk Profile

Investing regularly provides that highs and lows of the market don't prove to be detrimental to one's investment. Thereby lowering the risk profile.

  • Power of Compounding

Being invested for an extended period exploits the power of compounding, i.e., earning profits through the earned profits.

  • Convenience

Starting SIP is hassle-free, and the fact that the amount is automatically debited from the account saves the investor extensive research regularly.

When to Invest via this Method?

Several factors should be considered before taking an annual subscription (lumpsum investment) or opting for a monthly mode of subscription (SIP).

  • Limited amount of money

One question that new investors ponder is whether the money they invest is enough to give them substantial gains? The answer to this is somewhere between yes and no. While an amount of ₹ 500 invested once makes a little or no difference, the same invested regularly can lead to substantial gains. So, SIP can be a good stepping stone to one's investment journey even with low funds.

  • Finding the right mutual fund

Investing in the stock market is never a risk-free affair. However, a correct mutual fund can significantly lower investment risk. SIPs can be an excellent way to check one's compatibility with the mutual fund by tracking the investment returns and ensuring they align with the investor's interests.

  • Volatile market

SIPs can be the perfect way to beat a volatile market as regular investments average their rupee cost to the investor.

Lumpsum

Remember the annual membership we talked about? We're finally at that mode of investment! A lumpsum way of investment is where a large sum of money is invested in a mutual fund not in a periodic fashion but all at once. As with the previous case, this model, too, has its advantages. Let's have a look at a few of them.

Benefits of Lumpsum

  • Big investment

A significant amount can be invested at once, and when the market shows growth, a considerable amount of profit can be booked.

  • Good Returns

Historically, the markets have shown positive change over a long period. The people who hold on are the ones who get good returns, almost certainly.

  • Convenience

Many investors are more comfortable with a one-time investment instead of monthly deductions; lumpsum is a convenient method to invest for these people.

When to Invest via this Method?

A lumpsum investment must be made after considering the following factors:

  • Timing

It is always suggested to make significant investments when the market is discounted or in a slump. This ensures that the cost per unit of investment is low.

  • Risk Profile

The investment done under this method is priced at a fixed fee, and a minor correction in the market can paint an investor's entire portfolio red.

Thus, a lumpsum investment must be made based on an investor's risk appetite.

What is the difference between SIP and Lumpsum Investment?

Let us have a look at the absolute returns generated by various mutual funds over three years in lumpsum and SIP mode.

FUND NAME SIP RETURNS LUMPSUM RETURNS
Aditya Birla Sun Life Flexi Cap Fund 39.44% 73.45%
Aditya Birla Sun Life Balanced Advantage Fund 24.58% 49.60%
ICICI Prudential Liquid Fund 5.74% 14.51%
ICICI Prudential Technology 100.82% 160.30%

Finally, the elephant in the room… SIP vs Lumpsum Investment - Which mode is better?

While no one can certainly predict which mode would be better for a particular individual, here’s a comparative analysis you might consider before investing!

Criteria SIP Lumpsum
Type of investment Periodic One-time
Risk Profile Low High
Absolute Returns Usually Lower Usually Higher

We hope this leaves you with a solid ground to start your investment journey. We will be back with more! Till then, Stay Safe! Invest Safer!

FAQs

What are CAGR and XIRR?

CAGR(Compounded Annual Growth Rate) and XIRR(Extended Internal Rate of Returns) are two methods used to calculate return on investment. The former one is used to calculate the return on a one-time investment while the latter is used for a periodic investment.

What are ETFs?

Exchange-Traded Funds(ETFs) can be thought to be tradable Mutual Funds. These are aimed at tracking particular indexes and generally have a really low expense ratio.

What are different kinds of mutual funds?

The major types of mutual funds are equity funds, debt funds and hybrid funds.

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