SIP or Lump Sum – How should I choose?


SIP or Lump Sum – How should I choose?

Planning to invest for your future and investing for the same is the first decision in a series of decisions that an investor has to make. One of the dilemmas among investors is that through which mode they should invest, SIP or Lump Sum.

A direct comparison between both these modes of investing is neither fair nor possible. There are many factors at play and the better option differs according to the investor circumstances.

First let us see how these two options fare in different time periods for various categories of Mutual Funds.

For our analysis let us take three funds as listed below:

  1. Birla Sun life Equity Fund – Equity Multi Cap
  2. HDFC Balanced Fund – Balanced Fund
  3. Tata Short Term Bond Fund – Debt fund

We analysed both the modes SIP & Lump sum over two time periods:

  1. July 2007-July 2017: 10 years. Market crashed within a few months of the investment, then remained flat for few years after recovery and in recent times witnessed a bull run. Hence, a full cycle of the market.
  2. July 2012-July 2017: 5 years. Market was flat for some time and then a bull run. This market hasn’t yet seen a big crash.

For case (i) we took investment of total ₹ 50,000 in both lump sum and SIP; Lump sum on 10th July 2012 and an SIP of ₹ 2,000 for 25 months starting on 10-7-2012.

Sip or Lump sum

SIP or Lump Sum

As you can see in the above table, though SIP has given better returns in the 5 year period, lump sum investment resulted in higher corpus for equity funds. For debt fund lump sum gave better returns and corpus in lump sum investment.

For case (ii) we took investment of total ₹ 50,000 in both lump sum and SIP; Lump sum on 10th July 2007 and an SIP of ₹ 2,000 for 25 months starting on 10-7-2007.

SIP or Lump Sum

Sip or Lump Sum

For debt fund, even for long term of 10 years lump sum is a better option. However in long term for equity funds, SIP gave better returns and also generated higher corpus through SIP.

Do not make your decision yet, since there are many other factors in play to decide investment mode, let us go through them:

  1. Salaried investor: A salaried person has a regular cash flow; hence, investing in SIP is a better approach. SIP inculcates the discipline of investing regularly and should be used for long term investments, i.e. for 5 years or more as it will help you average out the cost of investment and give better returns. However, if you get a lump sum in the form of bonus etc. you may look to invest it in a lump sum though with some precautions and to know what precautions you should take, keep reading below.
  2. New Investors: If you are investing in equities for the first time, do take the SIP route. The equity markets are volatile and seeing the value of the investment going down can cause jitters for any investor and more so for a new investor who is not used to of market volatilities.
  3. Investing for Short Term: If you are investing for short term, say for 3 years to buy a car, then you should go for lump sum and get your money to work immediately. Also, since for short term goals debt funds are a better choice, lump sum will give you better returns than SIP.
  4. Windfall gain: In case you get money as a windfall, for example a bonus, then you may use the STP (Systematic Transfer Plan) option look to invest it as a lump sum in a liquid fund and then transfer a fixed amount per month to an Equity Fund of your choice. If you have good understanding of the equity markets and are ready to take the risk that comes with the volatility you can invest a lump sum in the equity fund too.
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From the above points it is clear that to decide on the investment mode circumstances and investing experience should be considered and though SIP seems to be the safer option, lump sum may also provide better returns if invested judiciously.

Through SIP you will inculcate discipline to invest regularly and if you research thoroughly before investing you can gain from lump sum investment by getting to work your investment at once.

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