SIP or Lump Sum – Which Works Better for You

SIP or LumsumSIP or Lumsum

Here in this article, we will be going through SIP or Lump Sum investment advice and which works better for you.

Let’s assume (just for a moment), you actually have some extra cash for investment purposes!

In most cases, this means you have a decent paying job, with money left-over each month, post your expenditure and savings. Or, you might just have a pot of gold, leaving you with truckloads of disposable money to invest!

Either way, it leaves you with the burning question – SIP or Lump sum?

Conventional wisdom would say,

  • You are insanely rich and have a large pile of cash lying around aimlessly, then lump sum investments are the best
  • You have decent amounts of money you save every month from your income, then SIP is the way forward

Unfortunately, the answer is not as straightforward as this.

Your individual financial goals, both short-term and long-term, your risk appetite and the returns you expect, are some of the essential factors which dictate your choice of mutual funds investment.

Ultimately, your financial goals should decide your investment strategy. Your goals could be short-term such as buying a bike in the next one year or long-term such as purchasing a house in the next 10 years.

Hence, based on what your current situation is and what goals do you want to accomplish, the following can help.

  1. You have a Bountiful of Money

Your return on investments is calculated using the same compound interest formula you were taught in school.

Compound interest works such that it tends to reward long-term investments. This means that you tend to create a larger pool of wealth on lump sum investments as compared to a monthly SIP, for the same period and similar interest rate.

Let’s take a look at the following scenarios to illustrate this better.

As we can see, a lump sum investment of 6 lakh rupees can reap you returns in excess of 4.5 lakh rupees over a period of 5 years at 12.30% interest rate per annum.

Whereas, when the same amount is split into monthly investments of Rs 10,000, for a period of 5 years, you will earn around 2.24 lakh rupees at 12% interest rate.

Thus, if you get a windfall of money from the sale of a property or from a bonus payout at work, its ideal not to let this money rot in a savings bank account and the better option, in this case, would be to go for lump sum rather than SIP.

You can argue that monthly SIP will work just fine as well. However, you need to remember that in a monthly SIP, you invest just a fixed amount of your proceeds every month, and not the whole amount at one go. This means a major portion of your proceeds continues to lie in a savings-bank account, generating negligible returns.

Your best bet to maximize your wealth in this scenario would be to make a lump sum mutual funds investment.

  1. Your Investments are from your Monthly Savings:

The dilemma of a lump sum investment or a monthly SIP arises only if you have a large corpus of money to invest. But if you are a young professional, and want to invest part of your salary every month in mutual funds, then SIP would be the smart choice.

And the following are the reasons as to why,

  • You invest a small, fixed amount every month
  • You learn about equity markets on the fly
  • Since your amount of investment each month is low, you tend to lose a lower amount of money if the markets crash.
  • You can stop your monthly SIPs anytime you like. For instance, if you cannot afford to invest monthly because of a change in your financial situation
  • SIP serves as a good initial platform for investing before moving on to other higher-risk avenues
  1. Your Risk Appetite

SIPs involve monthly investment into mutual funds irrespective of the market forces at play. Hence, these become ideal for newbie investors who do not possess much market knowledge or know about the nuances of investing.

Depending on whether the market is strong or down, you end up buying less or more units of the same fund every month. When the market is strong, you buy lesser units and vice versa.

Similarly, you end up selling more units when the market is high; thus, balancing out your cost per unit. This phenomenon is also called Rupee Cost Averaging. Your associated market risk, thus, falls on the lower side in SIP investments since your investments are balanced out irrespective of market conditions.

Lump sum investments, however, are high-risk. You will make a killing if the markets are high. However, if the markets crash posts your investment, you might end up losing a large amount of money.

Market forces dictate your investment returns. You necessarily need to be well-versed with the markets, before investing lump sum. You need to time your investment just right and keep faith in the markets for a long period to reap the fruits of your investment.

In conclusion, you need to be smart and have a goal before you start investing. Take into consideration your targeted returns, your monthly expenditure, and your monthly savings before you decide your quantum and strategy of investment.

Make the most of our guide to reach your decision and begin your investment journey right away!

About the Author:

Samant Sikka-Chief Dreamer & Founder,

This piece has been written by Samant Sikka, Chief Dreamer & Founder of Sqrrl – a personal finance, fintech venture targeted at young Indians helping them improve their relationship with money ultimately helping them Save, Invest & Prosper!!

Samant has been a student of financial markets & human behavior for 20+ years helping investors, institutions, and advisors. He has vast experience across Strategy, Sales, Business Development & Advisory Roles with stints at Axis Asset Management, Goldman Sachs, Franklin Templeton, AIG, and Darashaw & Company.

Categories: Guide