Should you invest through SIP or Lumpsum?

SIP or Lumpsum – which is better?

SIP-vs-lumpsum-investment

A common question that arises in the mind of every investor is – Should I invest through SIP or Lumpsum? A systematic investment plan (SIP) is a hassle free and smart way to invest your money in mutual funds. It works on the principle of continued and regular investments and is much like a recurring deposit, where you put a small amount of money every month. It enables you to invest via smaller periodic investments (Monthly/Quarterly/etc.) instead of a heavy lump sum one. SIP, for instance, allows you to invest with ten periodic investments of Rs. 1,000 each, instead of investing Rs. 10,000 at one go in a mutual fund. You can invest the money monthly or quarterly without changing your other financial liabilities.

It’s important to understand the rupee-cost averaging concept and the power of compounding for better appreciating how SIPs work. SIPs have brought mutual funds within the reach of ordinary people because it enables those with a tight budget to invest Rs. 500 per month, Rs. 1,000 per month or any amount they would want to.

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Making small investments via SIP may not seem attractive at first. But it enables investors to get into the habit of savings. And, over the years, the money can compound to generate handsome returns. For instance, a monthly SIP of Rs. 1,000 at 12% growth, would amount to Rs. 2.3 lakhs in 10 years, Rs. 34.95 lakhs in 30 years.

Even for high net worth individuals, SIPs reduce the chances of badly-timed investments and losing sleep over a wrong decision. But the real benefit of an SIP can be derived if you invest at lower levels.

How does an SIP work?

The money that you contribute to an SIP scheme is usually auto-debited from your bank account. You are allotted a certain number of units depending on the present market value of the fund (called net asset value or NAV) on the day.

Every time you invest money, additional units of the mutual fund scheme are bought at the market rate and added to your account. You keep buying units at different rates which help investors to benefit from the rupee-cost averaging as well as the power of compounding.

Why SIP?

Here are a few reasons to go for an SIP:

Discipline: The cardinal rule to build a corpus of money is to invest regularly, stay focused, and maintain discipline in your investing pattern. Rs. 500 or Rs. 1000 set aside every month won’t dent your monthly income. Besides, it’s always easier to part with Rs. 500 every month, instead of investing a lump sum at one go.

The power of compounding: It’s advisable to start investing early in life. In fact, I always recommend that once you start earning, you should start doing an SIP. A major reason behind this is the power of compounding.

Let’s take an example: Ramesh starts investing with Rs. 10,000 every year at the age of 30. Anil, on the other hand, begins investing an identical amount from the age of 35. At the time when both of them reach 60, Ramesh will have a corpus of Rs. 11.33 lakhs, while Anil will have only Rs. 7.31 lakhs (assuming an 8% compounded return on investment). The Rs. 50,000 difference in the invested amount would lead to a difference of over Rs. 4 lakhs at their respective age (60) of retirement. The effect of compounding would cause the difference. The longer you stay invested, the higher would be your returns.

Rupee-cost averaging: This is especially true while investing in equities. When you invest a fixed amount in an equity fund regularly over a period, you buy more units at a lower price. Thus, you reduce the average cost per unit in the long run. This strategy is known as “rupee-cost averaging”. With a long-term and sensible investment approach, this averaging can iron out market ups and downs and lessen the risks of investing in a volatile market. People investing via SIPs capture both highs and lows of the market. The average investment cost comes down in an SIP because you would pass through all phases in the market, bear or bull.

Convenience: SIPs are arguably the easiest way to invest. Now, with the advent of so many automated platforms as well as ECS instructions in place, the fund managing company will auto debit the SIP amount on your requested date and credit the units to your account. It will also inform you in this regard.

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SIP or lumpsum for ELSS?

Equity-linked savings schemes (ELSS) are one of the most popular section 80C investments that provide both tax saving and capital appreciation. With the 2015-16 fiscal drawing to a close and benchmark indices showing signs of a turnaround, investments in ELSS are on the rise. In this context, it’s important to note that tax saving should always be incidental to your investment plan which in turn should be guided by your financial life goals.

But one perennial question that I always get from investors is, whether to invest lump sum or through an SIP for ELSS. Well, there’s no harm to choose the former. For all we know, compounding works better in the long run. However, ELSS Schemes are nothing but Equity Schemes; it will be good to go for an SIP to iron out the volatility.

But consider the following before taking a decision:

Investing for the long run: Think of lump sum investing, if you have at least 12-year horizon or more, in mind. The sanctity behind 12 years is that the markets didn’t yield any negative return within this time frame. In other words, chances of negative returns have been nil in 12-year buckets since 1980, irrespective of the date of your lump sum investment. Of course, it could be 10 or 15 years, depending on the time period we consider.

Rolling Returns

There’s no debate on what is a lump sum. It could be Rs. 50,000 or it could be Rs. 5 lakhs. It varies between individuals. When you invest in lump sum, there’s all the more reason to have a goal. But the tendency to fix a goal is better in case of SIPs, where you say something like, “I’ll invest Rs. 12,000 every month for the next 10 years towards my son’s education.” Here you have a fair idea of what to expect, not merely in terms of returns, but also regarding your savings. In case of lump sum, there are chances that you won’t top it up to ensure a comfortable kitty. SIPs let you increase your savings gradually, sans denting your cash in hand, and without hurting you in the market.

But if you have money to spare, and only want it to grow without any target, lump sum could be good.

Also read: Understanding Mutual Fund Returns: CAGR, XIRR, Rolling Return

Transferring Systematically

So what do you do if you have a lump sum but can’t park it at one go because you don’t fit into any of the above criteria? Invest in a debt fund which has no exit load and opt for a systematic transfer plan (STP) to an Equity Fund. The lump sum, in a short-term debt fund, will fetch you higher returns than savings bank interest, and at the same time, allow averaging by entering the market systematically. The choice you have is to take a shorter averaging period (6 to 12 months) if the amount isn’t too large.

systematic-transfer-plan

STP is a variant of SIP. It essentially involves transferring your investment from one asset class to another. The transfer usually happens over a period of time. Here, you can withdraw a fixed amount from a debt fund instrument and invest in equity-oriented funds. It can go on for as many months you want. For instance, if you want to carry on STPs for three years, your fund manager will automatically transfer money from your debt fund to an equity fund each month. The strategy largely acts as a defence against market volatility.

Important points to remember

• STP is probably the second best investment strategy after SIP. It’s one of the best risk mitigation systems in the market. While STPs protect investors from unforeseen losses, they also cap returns when markets are bullish.

• Investors have to exercise financial discipline in STPs that benefit only when properly followed. Breaking an STP because of short-term interest rate or market movement, would only damage long-term investment goals.

• Finally, you must understand the assets and their current stages as well as the financial life goals for which you are investing.

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SIP or Lumpsum – The bottom line

SIPs and STPs are the best investment strategies—compared to a lumpsum—in any market condition. However, it would be good if it’s done under expert guidance. Sporadic investments, guided by sentiments, can significantly damage your investment goals. Little drops of water make the mighty ocean, but ensure that you have an expert sailor to tide you the waters.

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About the author

KishorKumar Balpalli, believes that financial literacy and discipline is the key to one’s financial freedom. KishorKumar is a Certified Financial Planner, Personal Finance Blogger & the Founder of myMoneySage.in an award-winning Wealth Management platform. myMoneySage simplifies investing for individuals and amplifies business growth for Registered Investment Advisers by leveraging Artificial intelligence and machine learning. The AI of the machine plus the intellect of the human advisor enables comprehensive & client-centric advice at a fraction of the cost of a conventional adviser.

myMoneySage.in is an award winning personal finance platform. It helps you aggregate all your personal finance accounts like FD, Equity, Mutual Funds, PPF EPF, NPS including, Credit Cards & Loans etc. It's one place where you can track, plan and invest seamlessly. myMoneySage.in empowers you to invest in zero commission direct plans of mutual funds thereby helping you generate higher on investments. The best part is it comes with a lifetime Free plan.


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  • Mrs. Homemaker says:

    In the current economic condition, which is the best debt fund and which is the best equity fund ideal for investing?
    Also, in a STP can we invest in any debt fund and transfer to any equity fund or are there fixed combos?

    • Research Desk says:

      Two important things that needs to be defined before you start investing in mutual funds
      1)The tenure of your investment
      2)Your risk profile.(you can do so by logging into mymoneysage application)
      There are no pre defined combos for a Systematic Transfer Plan, you need to choose a debt/money market fund without an exit load

    • Mymoneysage says:

      Two important things that needs to be defined before you start investing in mutual funds
      1)The tenure of your investment
      2)Your risk profile.(you can do so by logging into mymoneysage application)
      There are no pre defined combos for a Systematic Transfer Plan, you need to choose a debt/money market fund without an exit load

  • Vijay R says:

    If one has a longterm perspective,is disciplined, Isnt it better to invest Lumpsum at periodic intervals when the market experiences its bearish low so that more MF units are purchased ? Wouldnt that be a better strategy than invest in the market with an SIP even when you know that you will be buying less units when the market is at high P/E levels?

  • Khushbu Ratma says:

    Can you suggest a good sip for investment upto 3k monthly

  • Syam Mohan says:

    I am 42 age with two kinds. I am planning for 3-5 years investment in mutual funds for my kids education. My financial goal is to meet my kinds educational needs (they are 5 & 7 Years age). I can invest 10,000 pm.. if they cover tax … Its would be added advantage for me.. can you suggest..???

  • tm reddy says:

    i have investment in 1) icici prudential fucused blue chip grouth 3000 sip (2) sbi blue chip equity direct grouth 5000 sip & i have have 8 lakhs to invest iam thinking to lumpsum invest can u sugest good funds & is it good to go for lumsum time fram is 7 years

  • venkata ramana says:

    currently my age is 38 years, i had a 2 kids, one is studying 5th class and another one is UKG. i am looking for monthly 10000 investment that should be useful for my kids education at the time of their degree (After 10+2). that means one kid having the 7 years & another one 12 years to reach their Graduation.

    Can you please suggest best way to investment.

  • Anand says:

    I would like to invest Rs 15 lacs for my 18 year old son in STP and then do a equity SIP for a 4 year time frame preferably in Edelweiss AMC. Could you suggest suitable fund for both STP and SIP in Edelweiss AMC

    • Mymoneysage says:

      Dear Anand

      Thanks for reading the article!
      For an STP, you may consider a liquid fund. As your tenure is 4 years, going completely equity won’t be advisable. Hence, For an SIP, go for a balanced fund. It gives the right blend of debt & equity for an intermediate horizon, although you need to settle for lower returns.

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  • Alpha Rules says:

    Could you please explain the difference between direct and regular . I know direct has better returns . But is it advisable for an absolute beginner ?
    The bank advisor adviced me to go for regular

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