Finance

SIP VS LUMPSUM

The most common dilemma among retail investors is choosing the right types of mutual funds for their investment portfolio. Once they are done with that, the next question that bothers them is choosing the right mode of investment for their portfolio. And mind you, it is as important as choosing the right type of investments for your portfolio. For those who are unaware, there are two ways through which you can make investments in mutual funds – lumpsum investment and SIP investment. So which mode of investment is ideal for you? This article aims to answer that question and solve your dilemma.

When is SIP more suitable for investors?

Systematic Investment Plan or SIP allows investors to invest in mutual funds on a regular basis. An SIP mode of investment is ideal if you have regular flow of cashflows. It is also usually ideal for investors who have a low risk appetite and do not want to risk their capital by timing the markets through lumpsum mode of investment. An SIP investment has several benefits – it is light on the pockets of investors, the investment strategy of rupee cost averaging that averages out the total cost for buying mutual fund units, disciplined mode of investing, higher flexibility to investors, and the most important – no need to time the markets.

SIP investments tend to work the best during falling markets as this allows investors to accumulate a higher amount of mutual fund units at low price. Also, SIP investing is ideal if you are looking to invest in equities for a longer duration.

When is lumpsum more suitable for investors?

Lumpsum mode of investment is ideal for those investors who wish to invest in mutual funds for a short duration, probably debt mutual funds. Lumpsum mode of investment work the best during rising markets. This mode of investing is ideal for investors with slightly higher risk appetite in pursuit of higher returns. To invest in mutual funds via lumpsum, one needs to closely track the markets, as the time when they enter and exit the markets are highly crucial.

For investors who are scared that they might fail to time the markets correctly (because let’s face it – it’s not everyone’s cup of tea and most investors end up making significant losses), there is a way out. You can choose to opt for STPs or systematic transfer plans. STP is a systematic and regular transfer of funds from one mutual fund to another. It’s similar to SIP, except the funds are not transferred from a bank account to a mutual fund scheme, but rather from a mutual fund scheme to another mutual fund scheme. So, you can invest in mutual funds via SIP and then systematically transfer your funds through STP into another mutual fund scheme.

What should I choose? SIP or lumpsum?

There is no correct answer. Both the way of investing has the potential to perform exceptionally well and bad depending on several factors. Determine the flow of your cashflows – is it regular or irregular? What is your risk appetite – high or low? What is your investment duration – long term or short term? These factors can help you make this decision. Remember, both these modes of investments have their sets of pros and cons – choose the one that makes more sense for your investment portfolio. You can also determine the future value of your investments using a lumpsum calculator or an SIP calculator (depending on the mode of investment you choose). Happy investing!

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