InvestmentMutual Fund

What is better SIP or lump sum investment?

Hybrid Funds

Equity-linked saving scheme (ELSS) is one of the only mutual funds that help you in tax saving. You can invest your money under ELSS in two ways either through SIP or lump sum payment.

SIP or Systematic investment plan is a process under which you can invest in mutual funds in small amounts periodically. This frequency can be weekly, monthly or yearly according to the investor’s preference while lump sum payment is investing in mutual funds in a single payment.

SIP and Lump sum payment are both good ways of investing in mutual funds. But it must be said SIP has the edge over lump-sum amount.

So what the benefits of Systematic investment plan over Lump sum payment?

Constant watch on the market not required

An inexperienced investor gets confused about the right time to invest in the market. Spending a significant amount is always risky in case of a market crash leading to severe losses. While you may get a good return if the market is on a high.

Also Read: What You Need to Know Before Buying Stocks

SIP investment plans help in spreading your money over a period of time. It will help in minimizing the risk, and only a part of the investment will face the market risk.

Cost averaging   

SIP investment plans also help investors invest money in different market cycles. The fund manager who is managing your SIP will accordingly buy more units and sell when the market is high, bringing more profits. This is called the rupee cost averaging.

Builds in the habit of saving

Under Systematic investment plan, an investor has to invest a fixed sum of amount in mutual funds which instils a habit of saving money.

Helps you plan better

Systematic investment plan helps you plan your investments and manage your monthly fund flow better. Unlike Lump sum payment where invest in mutual funds in a lump sum, through SIP, you can invest depending on the market conditions.

Good for new investors

If you are a new investor in mutual funds, then it always great to start it through SIP investment plans. It helps in giving the necessary expose about equities with lower risk. Once you gain the confidence, you go in for riskier equity schemes which will provide you with higher returns.

Better performance

Systematic investment plan consistently gives excellent long term return when compared with lump-sum investment.

While Systematic investment plan (SIP) cuts through market risk and keeps investing when the market is down. It helps in maintaining an investment discipline and move forward in a planned approach. While lump-sum investments are much riskier but give considerable returns in the long run.

Also Read: Value Investing: The Butterfly Effect

It is tough to say which one is the best. All depends on how much risk is the investor willing to take while investing in mutual funds. SIP investment plans are the best for new investors and salaried people who usually avoid risk and want fixed returns from mutual funds. Lump-sum investments are best for professional investors who have a good knowledge of the market and its risk and volatility.

Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of Finaacle.com - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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