Investing in mutual funds is one of the best ways of long term wealth creation. It is a hugely popular investment tool worldwide and also in India. An investor can choose to put a lumpsum amount into a mutual fund scheme or can also put a fixed amount at regular intervals in the mutual fund scheme. Let’s understand the concept with an example. Suppose Mira wants to eat a ‘Laddoo’ which is an Indian sweet. She can have the entire ‘laddoo’ in one go or she can divide the ‘laddoo’ into two parts and then eat it. Here the ‘entire laddoo’ represents lumpsum and ‘laddoo divided into two parts’ represents SIP.
Lets take a monetary example. Naren has an amount of Rs 60,000 which he wants to invest in a mutual fund scheme. He can invest the entire amount of Rs 60,000 ‘one time’ in a mutual fund scheme which would be a ‘lumpsum investment’. Or he can invest Rs 2,000 per month over a period of 30 months. This would be a SIP. Both these investment styles can be used to generate gains.
When to pick SIP?
SIP is a tool for long term wealth creation. It is suitable for investors with limited monthly income who are looking to build a corpus over a period of time. New investors, young professionals who have just started their careers and people with irregular income can use SIP to grow their money. It is also suitable for people who don’t have time to do research or have no knowledge of equity markets. SIP is an investment style for all seasons and for everyone. You don’t have to worry about timing the market. If you stay invested through SIP consistently for a long time period, your investment passes through all market cycles.
When to pick Lumpsum investment?
Lumpsum investment style can be used to make massive gains after a bear market has ended or when the markets have crashed and hit rock bottom. For example, in May 2020, all stocks were trading at huge discounts during the Covid lockdown. It was an ideal time to invest ‘lumpsum’ amount as it would have generated windfall gains subsequently. Lumpsum investments also help to make more money in a bull market. In a rising market, lumpsum investment can bring higher returns.
Key differences between SIP and lumpsum
| SIP | Lumpsum |
| Fixed amount invested at regular intervals | One time investment of a large sum of money |
| Benefit of rupee cost averaging available | No such benefit available |
| Offers more flexibility. You can top up SIP as and when you have more money. | Relatively less flexible. |
| Generally SIP generate greater returns over a period of time due to power of compounding | Returns on lumpsum investment tend to be lower than SIP returns over a period of time. |
To conclude, SIP or lumpsum investment is a personal choice. Factors like income, financial state, investment goals and risk appetite determine the suitable investment path. You can build wealth with small monthly contributions in a SIP which makes it a more preferred investment option. Also SIP tends to generate higher returns over a period of time due to cost averaging and power of compounding.
