Investing in mutual funds is the most preferred way of investment in our country. Many individuals find it an attractive way to make wealth. Mostly the investment were done in SIP or Lump sum mode. However, individuals often confuses in making the correct choice between the two. "Systematic Investment Plan (SIP)" and a "Lump sum investment". Both are the methods of investing in the same financial instruments like mutual funds, bonds ETF. Many experts on social media always suggest for SIP. But the question keep lingering, which is better? Which offers higher returns and lower risk?
Systematic Investment Plan, involves depositing small amounts of money each month. Whereas, a lump sum involves investing a large sum of money all at once. But both have key differences in execution, risk, and suitability for different financial situations. SIPs inculcate the habit of regular savings. It's a disciplined investment methods. Lumpsums, on the other hand, are suitable for those with a larger corpus, but they carry a higher risk of market timing. In last few years, I have analyzed certain points and helped few of my family member in choosing the right option. To calculate which one of them gives a higher returns I made use of online calculator by SBI securities from one of the renowned mutual fund service provider. The result really is surprising and may be an eye opener for many.
Lumpsum Calculation : Investment Amount – Rs 1,20,000, Timeframe – 10 years, Minimum Return – 12%
SIP Calculation : Investment Amount – Rs 1,000 per month (which took my total investment equivalent to the Lump sum amount), Timeframe – 120 months (10 years), Minimum Return – 12%
| SIP Calculation | Lump Sum Calculation |
I have assumed a 12% return for my calculations. This return may vary depending on stock market fluctuations. This has been minimum return in last few years.
The Lump sum investment gives me an extra Rs.1,40,363/- which is a far better return as compared to monthly SIP. Ever since I came into earning, I was always asked to make SIP. But It is a myth that SIPs always win. Statistics show that over 10-15 years, the average return for a lump sum investment is 12-14%, compared to 10-12% for a monthly SIP. The difference is that lump sums carry more risk, while SIPs balance the risk.
To make a choice between the two depends upon the individuals appetite of risks. Market volatility is beneficial for SIPs. They offer more units at a lower price, reducing average costs. The risk with lump sum investments is that if the investment is timed incorrectly, losses can be significant. The best time for a lump sum investment is generally considered to be during a market correction or downturn, when asset prices are undervalued, allowing us to buy more units at a lower price at once.
If we can have monthly savings, SIP is the best option. It builds wealth gradually and reduces risk. Lumpsum is ideal when we have a large corpus and the market is low. Experts say that while lumpsum can offer higher returns at the right time, SIPs are a safer and more balanced option over the long term. This is why more and more individuals were pitching into SIP mode of investment.
In good faith - Peace!!
