Before going in-depth about the difference between SIP and lumpsum investments, let’s understand what is a mutual fund. Mutual funds are often termed as a basket of bonds and/or stocks, depending on the fund’s investment objectives,and are managed by a mutual fund expert known as a fund manager. The fund manager pools the money of various investors and invests it in multiple securities.Mutual fund investments can be made via the SIP (Systematic Investment Plan) or the lumpsumproute.
SIP vs Lumpsum Investment
SIP or lumpsumarejust differentmethods to invest in mutual funds and not financial instruments themselves. Investing in SIP is a process through which an individual can contribute a small but considerate amount periodically for a specified period to build a large corpus. For e.g., you might invest Rs500 per month in an ‘XYZ’mutual fund. Each month, on a date predetermined by you, this amount will be debited from your account and credited to the mutual fund account. This will then be further parked in the various instruments that form the mutual fund.You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus.
SIP offers multiple benefits like easy investing, rupee-cost averaging, power of compounding, etc. It also instils a sense of financial discipline among individuals, which is crucial to achieving long-term investment goals. An SIP investment makes it easier to keep aside a budget for retirement and other financial goals.
Mutual fund experts often advise investors to link their SIP investments with long-term investment goals. This ensures that you do not get tempted to exit the market when the market falls and remain focused on your goals.
On the other hand, lumpsum investments require individuals to invest the entire amount in one go. Investors with substantial unused cash anda high-risk tolerance usually prefer this mode of investment.
Difference between SIP and Lumpsum
| Parameter | Lumpsum | SIP |
| Cashflow | Once | Regular |
| Risk appetite | Moderate-high | Low-moderate |
| Time of investment | Subject to your investment goals and market volatility | Subject to your investment goals but somewhat immune to market conditions |
| Uncertain future income | Relatively recommended | Not recommended |
| Cost of investment | High (requires a significantone-time investment) | Less (thanks to rupee cost averaging) |
| Flexibility of investment | Low | High |
Depending on your risk appetite, your financial goals, and the amount of (liquid) money you can afford to invest in mutual funds, you can choose either of the two investment options available to you. Either way, the important thing to remember here is to invest. Only then would you be able to realise your financial goals. Happy Investing!