SIP vs. Lump Sum: Which One to Choose For Mutual Funds?

There are two ways to invest in a mutual fund: you can either make a lump sum investment or start a SIP

New Delhi: Recently, mutual funds have gained a lot of popularity among investors because of their convenience and the benefits offered. There are two ways to invest in a mutual fund: you can either make a lump sum investment or start a SIP. But which one to choose among the two options is a difficult choice. A mutual fund return calculator is an online tool that can help you make the right decision by calculating the returns of your investment for different investment periods.

SIP or lump sum, both investment options have their pros and cons. It is recommended to choose a strategy depending on your affordability and the type of mutual fund you are investing in. Keep reading to understand how to choose the best option for you.

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Advantages of SIP Investments

A systematic investment plan (SIP) allows investors to make small investments of a fixed amount on a regular basis in a mutual fund scheme. There are many advantages of investing through SIP mode.

1. Lower cost of investing
SIP investing works on the concept of rupee cost averaging, which means that the investment is spread over a time period reducing the cost of investing.

2. Disciplined Investing
SIP investments are done regularly over time and develop a discipline of investing in a planned way.

3. Not affected by market volatility
SIP investments are not affected by market ups and downs as the investment is spread out. You get more units when the market is down and lesser units when the market is high which means it works in a falling market thus balancing the cost of investment due to rupee cost averaging.

4. No need to monitor the market
SIP investments are made on a regular basis irrespective of the market condition. Hence an investor need not worry about constantly watching and timing the market.

5. Flexible
A SIP is a flexible way of investing where you can pause, start, stop or change the amount as per your requirement.

When to consider a SIP investment

SIP is a good choice for investors who cannot afford to invest a big amount at once. They can start investing in small amounts. SIP investments are good for equity funds for a long investment horizon. SIP investments let you reap benefits over the long term due to the power of compounding. You can automate monthly investments into a fund without any need to constantly monitor. Also, remember that SIP is beneficial in a falling market.

Advantages of Lump Sum Investment

A lump sum investment is when the investor makes the entire investment at once to buy the required number of units of a mutual fund scheme. It is beneficial when the fund’s NAV is lower and the investor can acquire more units at once. To get an idea of the return on your lump sum investment, use an online mutual fund return calculator.

A lump sum investment also has many benefits.

1. High liquidity
As a lump sum investment is a one-time investment, you can liquidate it and get benefits even in the short term when you need funds.

2. Higher returns
Lump sum investments can give much higher returns than a SIP investment in a rising market.

3. Give benefits in short-term
A lump sum investment can help you reap benefits in the short term if you understand the market and know how to time the market and when to enter and when to exit.

When to consider a lump sum investment

A lump sum investment is recommended if you can afford a one-time big investment. It is a suitable mode of investment for short-term debt mutual funds. Lump sum investments give maximum benefits in a rising market. However, depending on the market conditions, a lump sum investment can generate higher returns in the long term compared to SIP.

SIP or lump sum is a choice that depends on the investment objectives of an investor. There is no answer to the question of which is better between the two modes. Both work in a different manner for different investors. Therefore, it is important to understand the basic difference between SIP and lump sum investments. You can compare the returns generated by both investment modes for a given period using a SIP calculator and a mutual fund return calculator.