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SIP vs Lump Sum: Which is Better?

IndianMoney.com Research Team | Updated On Tuesday, December 10,2019, 02:58 PM

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SIP vs Lump Sum: Which is Better?

 

 

This is a dilemma many investors face. Invest in mutual funds through SIP or Lump Sum? If you invest the entire amount available with you, this is a lump sum investment in the mutual fund. Systematic Investment Plan or SIP is a method of investing in a mutual fund. You invest small amounts regularly say once each day, week or month in a mutual fund scheme of choice.

Difference Between Lump Sum and SIP:

The cash flows between SIP and Lump Sum are different. If you have a ready lump sum, you can easily invest in mutual funds. If you don’t have ready money, there’s no choice but to go for SIPs.

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SIP vs Lump Sum: Which is Better?

SIP is Better Than Lump Sum:

The power of SIP lies in rupee cost averaging. You get more mutual fund units when the markets are down and fewer units when the markets are up. You can easily average investment costs. The concept is simple. You get more units for a lesser price. Let’s understand the power of SIP with an example.

See Also: SIP vs RD: Which Investment Option is Good?

Ramesh bought 1,250 units of scheme XYZ at Rs 40,000 in January 2019. He gets this at Rs 32 a unit. His friend Suresh invests through SIP. Let’s take a look at Suresh’s weighted cost.

SIP Date

SIP Amount

Unit Price

Number of Units

15th January 2019

10,000

32

312.5

15th February 2019

10,000

36

277.7777778

15th March 2019

10,000

30

333.3333333

15th April 2019

10,000

28

357.1428571

Total

40,000

31

1281

You see Suresh gets more units at a lesser price by investing in mutual funds through SIPs.

Benefits of SIP over Lump Sum:

You Don’t Have to Track the Markets: Many investors are not sure when to enter the stock markets. If you invest a lot of money (lump sum), there’s a chance of a substantial loss in a stock market crash. With SIPs your money is spread over time, reducing the chances of a loss.

Rupee Cost Averaging: With SIPs you invest across market cycles. You get more units when markets are high and vice versa. This reduces the per-unit cost.

Brings Discipline in Investments: You invest small sums regularly in mutual funds. This forces you to be disciplined in investments.

Great for New Investors: If you are new to investing, SIPs are a great way to start. You get exposure to equities with nominal amounts. You then shift to more riskier investments.

Better Performance: SIP investments have consistently generated great returns. Take a look at performance over a 5 year period.

Power of Compounding: You enjoy the power of compounding or return on return if you invest in mutual funds through SIPs.

Less Stressful: This is a less stressful investment as you don’t have to care about market volatility.

See Also: Pick the Right Amount to Invest in SIPs

ELSS Investment: SIP or Lump Sum

Equity Linked Saving Scheme or ELSS is a tax saving mutual fund scheme. It has high exposure to equity with a 3-year lock-in. ELSS is an excellent long-term investment. ELSS enjoys Section 80C benefit up to Rs 1.5 Lakhs a year.

Naveen and Niraj both invest Rs 1.5 Lakhs in an ELSS scheme. The NAV or Net Asset Value of the scheme is Rs 10. (NAV is the per-unit market value of the fund).

NAV = Assets- Liabilities / No of outstanding subscribers.

Naveen invests Rs 1.5 Lakhs as a lump sum in the ELSS scheme. He gets 15,000 units of the ELSS fund. Niraj invests Rs 12,500 a month in ELSS through SIPs. He gets 1,250 units.

  • If stock markets rise steadily, Niraj gets lesser units as NAV rises. The average purchase price of ELSS units is higher for Niraj than Naveen.
  • If stock markets decline, Niraj gets more units as NAV falls. The average purchase price of ELSS units is lower for Niraj than Naveen.

Stock markets are known to experience prolonged volatility. This makes SIPs a better choice than a lump sum. You bring down the average purchase price called rupee cost averaging. If you are salaried and risk-averse, SIPs are the way to a great investment.

See Also: How To Invest In Mutual Fund SIPs Online?

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