Which investment option is better - Lumpsum or SIP?

One usual question people always ask which option is better – Lumpsum or SIP. In which mode they will have more profit. Before making any conclusion one must understand in mutual funds, one can invest in any of the asset classes – Equity, International Equity, Debt, Hybrid, Liquid, Gold & Multi-asset. Now there are only 3 modes of investments in Mutual Funds:

(a)  Lumpsum

(b)  SIP (systematic investment plan)
(c)   STP (systematic transfer plan)

(a)  Lumpsum:

• It is a one-time investment when you have a large amount to invest in one go.
• Most mutual funds take the minimum investment amount for a Lumpsum as Rs. 5000/-. There is no maximum limit to invest.
• Power of Compounding works much faster in Lumpsum than SIP.

 (b)  SIP (systematic investment plan):

• A fixed sum of the amount is invested at a fixed interval (frequency) for a longer period of time. For example, an investment of Rs. 1000 on a weekly / monthly/quarterly basis.
• Like loan EMI, through NACH, the amount automatically gets debited from your Bank account and then invested into a designated mutual fund scheme of your choice.
• It works on Rupee Cost Averaging i.e. you get more units when the market is down and fewer units when the market is up. Therefore, you should not worry about market ups & down.
• Minimum amount of SIP stats with Rs. 500/- or Rs. 1000/- depends on the scheme chosen. There is no maximum limit for SIP.

 (c)   STP (systematic transfer plan):

• STP is a mix of Lumpsum and SIP.
• The Lumpsum the amount is parked in the conservative fund (e.g. liquid fund) which provides appx. 5% - 6% p.a. return and amount systematically transferred into the aggressive fund (e.g. equity / hybrid fund) which provides appx. 10% - 12% p.a. return in the longer term.

                        

 Conclusion

• It totally depends on your Risk profiling.
• SIP mitigates market risk up to some extent, especially in a downtrend cycle.
• The focus should be on accumulating more & more units. This doesn’t mean you should buy funds which have lower NAV
• In the very long run SIP fetches more units as you keep on deploying the principal amount every month
• We advise going with both options simultaneously to capture all kinds of the market cycle - in a bull market, lumpsum perform better than SIP, and in a sideways market or bear cycle, SIP has more advantages to buy at a lower level automatically.
• STP can be preferred when you have lumpsum and you don't want to invest the entire amount at one go to avoid entry risk at the wrong level.

Disclaimer: Mutual Funds investment are subject to Market Risk