SIP vs lump sum investment? What should you consider?

Investment in mutual fund is customisable according to the needs and wants of investors. Thus, like numerous schemes to invest, mutual fund also has options in terms of periodicity in investment. It can be daily, 10 days, monthly, quarterly or one-time, whatever suits the investor. Continuous investment (every month) is termed as systematic investment plan, whereas one-time investment of any substantial amount is known as lump sum investment. It is pertinent to note that both investments are mere categorisation based upon the period of investment and have individual characteristics.

Features of SIP

• Lighter on budget: Small and regular investment, since the period between two investment is smaller, SIPs tends to be lighter on your budget, yet helps you create sizeable wealth. This type of investment is good for beginners.

• Helps in budgeting: As the investment is continuous at regular intervals, it helps one achieve ‘save first pay later strategy’. This indirectly brings discipline in spending habits at the same time helps you reach your financial goals.

• Power of Compounding: Possibly the most talked about feature of all SIPs and also the most effective of them. As and when the SIP generates return, those are re-invested in the corpus along with your new investment. For example, a Rs 2000 per month SIP, at the rate 10% compounded annual growth rate (CAGR), can generate Rs 1,54,874 after five years.

• Rupee cost averaging: Similar to power of compounding, this is another classic SIP feature that helps dodge the market volatility. It is a natural principle of ‘buy low sell high’. However, timing the market is difficult, thus investment via SIP can mitigate the risk of timing by investing continuously. This way one buys higher units of mutual fund when market is low and vice versa.

• Ease of investing: Today, due to digitalisation, SIP investment is easier. A one-time KYC and registration to common account number makes you opt, switch, stop, resume, modify SIP with just a click. In addition, the SIP amount debits from the bank account directly. Hence, no need to transfer funds or visit any website for payments.

Features of lump sum investment

• Larger investment amounts: Lump sum is investment of substantial amount at once. Since the amount is big, it also generates big returns without investing at regular intervals.

• Investment irrespective of fixed intervals: Lump sum investment has the luxury of investing anytime and also at any number of intervals as there is no bank mandate involved.

• Time-based investment: Timing is important aspect in this investment as investing in rising market is futile. Lump sum investment in rising market may result into costly purchases and thus impact the return percentage, thus lump sum investment is always ideal in falling markets.

Based on investor’s needs, it is easy to determine the right method of investment. Question such as tenure of investment, liquidity criteria, tax savings and most importantly the objective of the investment must be sought to recognise the correct method.

(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)