SIP Vs Lumpsum : Which One Is Better?
Mutual Funds are a popular Investment opportunity for different kinds of people like those who have full time jobs and many others who cannot focus completely on regular investing but want to earn good returns from the market.
What is a Mutual Fund?
Mutual funds are the investment where many individuals pool their money which are managed and wisely invested by a Fund Manager. Managers Invest the funds in a wide collection of stocks from different sectors which reduces the risk loss on average due to the mass diversification of the funds. And in return the manager takes a small percentage of the fund allocated by Individual Investors.
Most of the time these managers are funded by many individuals but some managers are funded by organisations like PFO (Provident Fund Organisation), Insurance companies and Pension Funds.These organisations provide these funds to multiply their returns and can pass these good returns to their Investors or beneficiaries.
How do mutual funds work?
An Individual who has no experience in trading or Investing or is busy with their job, allocates a part of their monthly income in the mutual fund according to their goal and risk taking capabilities. The manager receives the chunk of funds from many Individuals and invests it very wisely in different stocks, funds and commodities as per goals of the investors.
There are basically three kinds of investments that happen on the basis of ROI and risk.
1. Large Cap Investments:
- Equity investment done by managers primarily in top 100 companies of the country. These companies are some of the biggest brands of the country used regularly.
- Large cap funds provide low returns of 10-15% but are safe in the market. In bull run Large caps also provide upto 19-20% of returns.
2. MidCap Investments:
- These are the next top 250-300 stocks in the equity market with little more volatility. There are service based companies or companies which are establishing themselves in the market.
- MidCap Funds provide average returns of 20-25% with little risk due to volatility. In bull run these funds also provide upto 28-30%.
3. Small Cap Investments:
- These are the companies entering the market with big decisions and volatility. These are high risk high return plans where we can see 35-40% of returns.
- Managers also invest in Government bonds, Gold bonds and Oil bonds which can be less or more profitable according to the situation in global markets.
Systematic Investment Plan (SIP)
Systematic Investment Plan allows an investor to invest a fixed amount of money from their income at a fixed interval (mostly once in a month) in a mutual fund. This approach is well known for long term investing where investors make a disciplined investment over the time regardless of the market condition.
Benefits of SIP:
- It makes you a disciplined investor over the time which is well needed in the market.
- As investments are made monthly it averages the invested units which helps in lowering the risk of loss and volatility.
- In the long term it shows the power of compounding and returns are amazing in the time frame of 20-25 years of continuous investment.
- It allows young or small investors to enter the market with smaller capital as they can increase the investment in the future according to their income.
Lumpsum Investment
A lumpsum investment is involved in investing a large amount of funds at one time into any fund. This is basically done when the investor has a significant amount of funds available from sources like bonuses, Inheritance or liquidation of some other valuable property.
Benefits of Lumpsum:
- Investments are made in one go instead of longer period of time
- If invested in the correct time it has chances of higher returns in a shorter time period.
- It makes you understand basic market analysis which can help you in the future.
Key Differences and Advantages/Disadvantages of SIP vs Lumpsum
- Investments are made in one go instead of longer period of time
- If invested in the correct time it has chances of higher returns in a shorter time period.
- It makes you understand basic market analysis which can help you in the future.
Key Differences:
1. Timing Of Investment:
- In SIP you need to invest a certain fixed amount over a period of time to see a good returns
- In Lumpsum you need to invest a significant amount in one shot to see a good return
2. Averaging the Investment
- In SIP as you invest a fixed amount at a fixed time period it averages the risk as well as reward according to the market situation
- In Lumpsum you do not have an option of averaging the investment as you entered in one go. But it allows you to enjoy bigger returns in good market condition
3. Research and Analysis
- In SIP you do not have to do a deep research and analysis, all you need to do is find a good fund manager according to your risk appetite.
- In Lumpsum timing matters a lot because you are investing everything you have and if timing is not taken into consideration it might take a horrible turn which might lead to some losses in a shorter time period.
4. Return on Investment
- In a shorter time period the return on investment of Lumpsum can over perform SIP in favorable market conditions but for that you need bigger capital and higher risk acceptance mindset.
Advantages and Disadvantages of SIP and Lumpsum Investment
Advantages of SIP:
Can be started with smaller capital
Averaging can reduce the risk of loss
Builds a financial discipline over the time
No need to think much all you need is discipline
Unimaginable returns in longer time period
Disadvantages of SIP:
Lower ROI in shorter time period
Averaging reduces higher returns due to investment at different points
Need to be invested for very longer time
Overdependence on manager and change in team might lead to difference in outcome
Longer Lock-In periods
Advantages of Lumpsum:
We can enjoy higher returns in shorter time period if invested smartly
Makes you learn the basics of market
Easily withdrawable
Disadvantages of Lumpsum:
Need huge chunk of money in the beginning
Huge returns can expose the funds to higher risk
Cannot be averaged if conditions are not in favor
When to consider SIP over Lumpsum
- If you have a regular income and limited savings then SIP can be a better option for you to start smaller and build gradually
- If you do not have higher risk tolerance and want to avoid the market volatility you can go for SIP is a safer approach as it averages the Investment
- If you have discipline and have a long term view then SIP will be the perfect option for you.
When to consider Lumpsum over SIP
- If you have access to bigger capital and looking for investment then investing in Lumpsum will be a better option
- If you are looking for higher returns and have risk tolerance then Lumpsum is best for you
- If you have basic market knowledge of research and analysis and the market is in favourable condition then you can definitely look at Lumpsum investment.
- You can look at it If you have short term goals.
Practical example with real life scenario
Let us assume there are two different investors who are planning for SIP and Lumpsum investment respectively
Scenario A: Bull run Market
Person A invested 5,000 rupees over a year every month which will be averaged because person A is buying the units at different prices which is higher in this scenario
Person B invested 60,000 rupees in one go in a bull run market after a deep research.
Here Person B will outperform Person A because his funds were exposed to high bull run from day 1 while person A invested little amount every month.
Scenario B: Volatile Market
In this situation it is a whole different perspective because market cannot be predicted so it will favour Person A because he is buying at some dips and some highs and Person B is already all in and has no option other than waiting and watching.
Here person A will outperform person B because his investments are averaged at dips and have higher chances of returns in the long run. Even Person B will definitely make returns in the long run but may face losses in the short term when the market is volatile and not in favour.
What is a smart Investor’s move?
A smart Investor is the one who has a SIP plan going on monthly basis at lower risks and when receiving a bigger chunk of the capital they wait for the right time and buy more units at dips which sharply lowers the average buying price. By this method they make higher returns than any other average investor.
Also Read : what is paper trading and how it works ?
Both SIP (Systematic Investment Plan) and Lumpsum investments have their unique benefits, and the nice choice depends to your financial goals, risk tolerance, and market situations. SIP is good for those in search of to make investments step by step over time, reduce market timing risk, and constructing wealth progressively. On the other hand, Lumpsum investments may be extra rewarding when you have a substantial sum of money to make investments and the market conditions are favorable. Ultimately, understanding your financial situation and investing horizon will assist you decide which approach is higher appropriate for you.
FAQ
Is lumpsum investment better than SIP?
Lumpsum investment can overperform SIP in a short time if invested wisely and in favourable market conditions because the whole investment will be exposed to the market.
Which is better: Mutual fund or Direct equity buying?
If you have time and deep knowledge about the market and you can do all kinds of analysis then it is suggested to invest directly in stocks but keep in mind that risk will be higher because all your investment will be parked at few stocks. But a mutual fund should be chosen if you are a beginner and full time employee. Your investment will be handled by experts and will be parked in multiple stocks of various sectors.
Can I withdraw SIP anytime?
Well that depends on the manager you choose to invest with. Some have a lock in period where your investment will be locked for a given period of time and at the same time some managers do it without any lock in period where you can withdraw at any time.
Which SIP gives the highest returns?
Returns completely depend upon your loss bearing capacity, usually bigger returns are observed in Small cap funds where returns are around 30-35% but risk is higher.
Is SIP risk free?
No investment can be called risk free. In SIP it lowers the chances of loss in a longer time period by averaging the cost of buying.
