Which Is A Better Way To Invest In A Mutual Fund - SIP Or Lumpsum?

These days, there are so many options for investing. While it is good to have multiple options, for a first-time investor, making an investment decision can become confusing. Conservative schemes may offer fixed interest rates but the recent fall in interest rates has led to investors seeking better investment options. A lot of people are now considering mutual funds to add diversification to their investment portfolio.

While it is important to invest in a mutual fund scheme that aligns with your investment objective, investment horizon, and risk appetite, it is equally important to decide how to invest in it. The way an investor decides to invest in mutual funds may have a direct impact on their investment portfolio.

As of now, there are two modes of investing in mutual funds – SIP and Lumpsum. Today we are going to understand the differences between SIP and lumpsum investing and figure out which one is a feasible investment option.

What is SIP and lumpsum investing?

Be it SIP or lumpsum investing, every investor aims to create wealth with mutual funds. However, the difference between SIP and lumpsum is the number of intervals at which the investment is made. When investors make a lumpsum investment, they usually invest the entire sum right at the beginning of the investment cycle. Systematic Investment Plan or SIP, facilitated by the SIP app, allows investors to invest a fixed amount at periodic intervals (monthly, quarterly, once every six months). The minimum investment amount for SIP and lumpsum may vary. Investors are expected to refer to the Scheme Information Document (SID) to determine the minimum SIP or lumpsum investment sum.

To invest in mutual funds via SIP, investors may need to have a regular cash flow. Only then they might be able to invest every month or at every predetermined periodic interval. Lumpsum investing may suit those investors who have surplus money sitting idle and those who are willing to risk exposing their entire investment sum right from the beginning of the investment cycle.

SIP v/s Lumpsum

Why is SIP a better investment option?

Here are a few reasons why starting a SIP in mutual funds is better than making a lumpsum investment –

No need to time the market

There is always a risk of losing a large chunk of the investment sum, especially for those who make a lumpsum investment, when the market crashes. To start a SIP, investors may not need to time the market. Through SIP, the investment sum enters the market over time and only some amount of the investment sum is exposed to market volatility.

Power of compounding

You may have studied compound interest in school and the term ‘power of compounding’ is derived from that concept. In mutual fund terms, the word compounding refers to the interest earned on the profits earned through the initial investment sum. To witness small SIP sums multiply through compounding, investors may have to continue investing for the long run.

Rupee cost averaging

Since the SIP sum remains stagnant, the allotment of units may vary depending on the mutual fund scheme’s fluctuating NAV. When the net asset value is low, investors receive more units. Similarly, when the net asset value of the mutual fund scheme is high, lesser units are allotted. Over time, the average cost of purchase reduces and so does the overall investment risk.

These are a few of the significant features that make SIP investments a far better option than lumpsum. Also, investing via SIP may inculcate the discipline of regular saving and investing. To ensure that investing in mutual funds via SIP is ideal for your long term goals, feel free to seek professional consultation.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.