You can invest in two ways – either by investing a lump sum amount or via a systematic investment plan (SIP).
While the lump sum route is a single payment mode, under the SIP mode of investing, a fixed amount is invested at fixed intervals of time which can be daily, monthly, quarterly or semi-annually in properties of your choice.
But many investors are confused which is better investment. SIP and Lump sum both have their own merits and demerits.
Both these methods have their benefits, and the decision to choose either ultimately boils down to what’s convenient for you as an investor.
Let’s get a deeper understanding of the finer nuances of both an SIP and a lump sum investment.
2.0 LUMP SUM VERSUS SYSTEMATIC INVESTMENT PLAN [SIP]
Systematic investment plan (SIP) is a method of investing in which a certain amount of your cash is invested periodically. The certain amount is decided by the user and as per the scheme of investment.
The main advantage of SIP is that investors don’t have time to keep an eye on market and hence can pour in money into SIP. In SIP, one can also get the benefits of compounding i.e., you can reinvest the interest earned from the SIP.
In the long run, it can make a huge positive impact on your returns. Some of the advantages of SIP are: (i) Investment discipline (ii) Mitigation of risk (iii) Flexibility (iv) Hassle free
Lump sum investment on the other hand is a method of investment in which the investor invests the total money that he has kept for investment purposes in one go even before the start of investment period.
Some of the advantages of Lump Sum are: (i) Investment of big amount (ii) Ideal for long term (iii) Convenient one time payment
The table below highlights the key difference between SIP and lump sum investment:
3.0 WHICH IS BETTER?
Before deciding which investment method to go for, one needs to see how much money a person can invest. Additionally, the answer to this question depends on the market conditions as well.
During upward trends, the lump sum mode of investment tends to give relatively higher returns whereas during falling markets, investments made via a SIP generally provides better returns than a lump sum investment.
3.1 If an investor has a regular income and is able to save some money, he can choose to invest in SIP. Else if an investor has a large sum of money, he can go for lump sum investment.
3.2 Two factors are important while investing: (i) the amount of money invested, and (ii) the duration of investment. The more the money invested for longer duration, the better it is, that is, higher the return
3.3 In SIP, you buy more when the market is down, and buy less when the market is good. and as a result, you get a weighted average return over time.
3.4 If the market grows continuously into the future, lump sum investment gives greater returns as compared to SIP. However, in a volatile market, SIP is a safe investment.
Thus, with lump sum investment, an investor is exposing himself to the vagaries of the market, as there is always a chance of mistiming the market.
This risk is reduced with SIPs, because of investment discipline and it helps in averaging the cost without timing the market.
4.0 ADVANTAGES OF SIP OVER LUMP SUM INVESTMENT
4.1 Dollar-Cost Averaging
A SIP helps spread over time during both rising and falling markets. Whereas with a lump sum investment, your money would buy fewer units of the property when markets are up and more units when they are down.
Thus, a SIP enables you to lower the average cost of your investment and reduce the risk of your investment. This is known as dollar-cost averaging.
4.2 Power of Compounding
A SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is known as power of compounding.
4.3 Less Stressful
A SIP investment is less stressful than a lump sum investment and may help you stay invested. Markets can be highly volatile and can induce you to withdraw your money in a panic, if you have made a lump sum investment. This effect is less intense when you make an investment via a SIP because your money is spread out over time.
All investments that you are going to make should be in line with your investment profile, which includes your income, expenditures, risk profile, and financial goals.
Depending on your affordability, you can choose to invest through a Systematic Investment Plan (SIP) or making a lump-sum payment.
While both these forms of investment have their benefits, for a budding investor, investing via SIP is the suitable way to go. It is also a good way for new investors to gain exposure to equities with less amount of investment. In investing, the important thing to keep in mind is to stay invested for long, and with the power of compounding in SIPs, the returns can be substantial.