SIP Vs Lump Sum Mutual Fund Investments: This debate has been ongoing for years regarding which is better: systematic investment plans (SIPs) or lump sum investments when it comes to putting money into mutual fund schemes. There is no clear-cut answer to that, as there is no concrete trend suggesting that one is better than the other.
In fact, different market scenarios have shown varied results. During market downturns, SIPs have shown better performance, while when there is some stability and less volatility over a period of time, lump sum investments have shown better results. But again, the market is cyclical, and volatility is the only thing that is constant in the equity market.
SIP or Lump Sum: Confusion for new investors
The decision to choose between an SIP and a lump sum often confuses new investors. Both of these investment methods have associated pros and cons.
For example, SIPs offer a way to average costs, giving investors more units when markets are down and fewer when they’re up. Lump sum investments might perform better in consistently rising markets. Looking at long-term NIFTY 50 data, we see that SIP and lump sum investments show different performances. Neither method consistently outperforms the other due to market conditions and volatility.
This challenges the common belief that SIPs always bring better returns. Instead, SIP is just another investment method, not a guaranteed way to make more money.
SIPs Vs Lump Sum: What do the past trends suggest?
SIP is a method of investing in mutual funds, where a fixed amount is invested periodically on a regular basis. It can be weekly, monthly, quarterly, or yearly. Whereas, Lumpsum is a method wherein money is invested in one go.
Shrinivas Khanolkar, Head – Products, Marketing & Corporate Communication, Mirae Asset Investment Managers, says that both investment routes perform differently in different phases of the market, and there is a possibility that the market may correct immediately post lumpsum investment.
“In this scenario, average buying price of a unit of the mutual fund would have been lower under the SIP route. Therefore, SIP in a falling market scenario would have been able to buy more units of the mutual fund for the same price. On the flip side, if a market is constantly rising, like the way after the COVID-19 crash, the lump sum investments would have performed better than the investments made through the SIP route,” he explains.
An individual’s investment decision should be based on their cash flows, Khanolkar suggests. “For a salaried person, investing through SIPs would be an ideal route of investment as it is light on the pocket and inculcates financial discipline. Moreover, one can invest in small amounts without putting strain on finances.”
However, if one has a lump sum amount, investing it in one go can be a better choice than investing it in installments, he adds. “Keeping the money idle in a bank account may have an opportunity cost, which can lead to a lower corpus over the long term.”