SIP vs Lump sum Investment

7 min read • Updated 23 May 2023
Written by Nishant Prasad

Mutual funds are among the most popular investment options available today. Mutual funds are professionally managed investment vehicles that pool money from multiple investors to invest in a portfolio of securities. One of the key advantages of investing in mutual funds is that investors can benefit from diversification and professional management of their investments.

When investing in mutual funds, investors have two primary options: SIP (Systematic Investment Plan) and lump sum investment. This blog will delve deeper into the differences between SIP and lump sum investment and help investors understand which option is better suited to their investment needs.

Systematic Investment Plan

A systematic Investment Plan or SIP is an investment strategy where an investor invests a fixed amount of money at regular intervals (monthly, quarterly, or annually) into a mutual fund. These days you can also invest in stocks via SIP. SIP is a disciplined approach to investment that helps investors to accumulate wealth over a period of time by averaging out the cost of investment and minimising the impact of market volatility.

Features of SIP

  • SIP involves investing a fixed amount of money at regular intervals, which is then used to purchase units of a mutual fund. 
  • The investor can choose the frequency and the investment amount, which is deducted automatically from their bank account. 
  • The units are then allocated to the investor based on the mutual fund’s prevailing Net Asset Value (NAV).
  • SIPs are typically structured as open-ended funds, which means that investors can buy or sell units of the fund at any time. 
  • The returns on the investment are based on the performance of the mutual fund’s underlying assets.
  • SIPs help investors to average out the cost of investment over a period of time. This means that if the market is high, the investor will buy fewer units; if the market is low, the investor will buy more units.

Lump sum Investment

Lump sum investment is a one-time investment strategy where an investor invests significant money into mutual funds in a single transaction. This investment strategy involves purchasing many units of the investment instrument at the current NAV.

Features of Lump Sum Investment

  • The lump sum investment approach is typically used by investors with significant capital available for investment, such as from inheritance, sale of assets or other windfalls. 
  • This type of investment can offer the potential for significant returns over a shorter period compared to other investment strategies, such as rupee-cost averaging.
  • A lump sum amount in mutual funds exposes the investor to market volatility and risk. 
  • Market volatility is the fluctuation of an investment’s value in response to changes in market conditions, such as economic or political events. 
  • The risk of losing money from a lump sum investment is higher during a sudden market crash leading to significant losses.

Key Differences

Lets understand both of the investment option at a glance:

Key DifferencesSIP InvestmentLump Sum Investment
Risk FactorSIPs are less risky as the investment is spread over a period, minimising the impact of market volatility. This is because the investor is buying units at different NAVs. The investment is not entirely dependent on the market’s performance at a particular time.Lump sum investments are riskier as the entire amount is invested at once, increasing the risk of capital loss if the market falls soon after the investment. This is because the investor is buying units at a particular NAV, and hence the investment is entirely dependent on the market’s performance at that point in time.
Rupee Cost AveragingRupee cost averaging is a concept unique to SIPs. It allows investors to buy more units when the market is low and fewer units when it is high. This helps in averaging the cost of the units over time and reducing the impact of market volatility.Investors do not benefit from rupee cost averaging in lump sum investments, as the entire amount is invested at once at a prevailing NAV. This means that the investor’s returns are entirely dependent on the market’s performance at that point in time.
Timing the MarketTiming the market is less critical in SIPs, as the investment is spread over a period, minimising the impact of market fluctuations. Even if the market falls in the short term, investors can recover their investments in the long term.Timing the market becomes crucial in lump sum investments, as investors must monitor market movements and invest when the market is low.
LiquidityIn the case of SIP investments, there may be exit loads or penalties associated with early withdrawals. Moreover, each SIP is considered a fresh investment. So, each SIP needs to fulfil the criteria for exit load. If exit load is not the concern, SIP or lump sum offer higher liquidity.If exit load is not a concern, lump sum investments offer higher liquidity. If we consider exit load, even then, lump sum investments offer higher liquidity compared to SIP, as lump sum investment is a one-time investment.

Benefits of Choosing Lump sum Investment as an Investment Strategy over SIP

While SIPs offer certain advantages over lump sum investments, there are also some advantages of lump sum investments over SIPs. These advantages of lump sum investment over SIPs include:

  • Potential for Higher Returns: Lump sum investments have the potential to generate higher returns compared to SIPs.
  • Lower Transaction Costs: Lump sum investments involve a single transaction, meaning lower transaction costs than multiple transactions in SIP investments.
  • No Obligations: Lump sum investments do not come with obligations or commitments, unlike SIPs, where investors must invest a fixed amount of money at regular intervals.

Benefits of Choosing SIP as an Investment Strategy over Lump sum Investment

  • Disciplined Approach: SIPs help investors develop a disciplined approach to investment by investing a fixed amount of money at regular intervals.
  • Risk Mitigation: SIPs mitigate the risk of investing a large amount of money at once by spreading the investment over time.
  • Averaging Out Cost: SIPs help average the cost of investment over time, reducing the impact of market volatility.
  • Affordability: SIPs are more affordable for investors as they can start with a small amount of money and gradually increase their investment.
  • Flexibility: SIPs offer greater flexibility as investors can change the amount or frequency of their investments according to their financial situation. 

Which Investment Option is Better?

There is no definitive answer as to which investment option is better, as it depends on an individual’s financial goals, risk appetite, and investment horizon. SIP and lump sum investments have advantages and disadvantages, and what works for one investor may not work for another.

If an investor has a large amount of money available and is confident about market conditions, a lump sum investment can provide higher returns in a shorter period. On the other hand, if an investor has limited resources and wants to spread out the investment risk, SIP can be a more suitable option.

Ultimately, deciding which investment option to choose should be based on a thorough understanding of one’s financial situation, goals, and investment objectives. It is also essential to consult a financial advisor before making investment decisions.

Frequently Asked Questions (FAQs)

Can I invest in both SIP and lump sum at the same time?

Yes, investors can invest in both SIP and lump sum investments simultaneously.

Can I stop or pause my SIP investment at any time?

Yes, investors can stop or pause their SIP investments anytime without incurring any penalty or charges. However, they may need to pay an exit load if they withdraw their investments before the lock-in period.

Is it better to invest in SIP or lump sum for tax saving purposes?

SIP and lump sum investments can be used for tax saving purposes, as ELSS (Equity Linked Saving Scheme) funds offer tax benefits under Section 80C of the Income Tax Act of 1961.

Is it necessary to have a demat account for SIP investment?

No, having a demat account for SIP investment is unnecessary, as it can be done directly through mutual fund companies or online platforms.

Can I invest in both equity and debt funds through SIP or a lump sum?

Yes, investors can invest in equity and debt funds through SIP or lump sum, depending on their investment goals and risk appetite. Diversifying the investment portfolio across different asset classes to minimise risk is important.

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Nishant Prasad

Chief Compliance Officer
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 8+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert. He has previously worked for Khaitan & Co and Scripbox.

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