You are interested in Mutual Funds, you heard you can invest monthly into it something similar to RD (Recurring Deposit). This is called Systematic Investment Plan (SIP). There is another traditional way to invest your money which is Lumpsum payment, locking your money for a specific amount of time.
Let’s read about SIP and Lumpsum payments plus their benefits over one another, and which one suits you the best.
What is SIP?
SIP or Systematic Investment Plan is a method of investing in mutual funds wherein an investor invests a certain amount of funds at regular intervals. This investment takes in a small amount of investment regularly rather than investing a large amount at a point in time.
What is Lumpsum?
Lumpsum investment is the investment method wherein an investor invests a significant amount of money at one go rather than multiple small investments.
|Type of Investment||SIP is done with investments made in instalments. The whole capital is not invested at once.||A lump sum investment, on the other hand, is a significant quantity of money invested all at once.|
|Ideal Investors||SIP is best suited for young and significantly new investors.||Lumpsum investment is suitable for seasoned or veteran investors who have been in the market for quite some time.|
|Time period of Investment||SIP provides clients with a variety of investing options, with respect to time.They can also be stopped any time without paying any penalty or charge.||The amount of a lump sum payment, on the other hand, is locked in for a specific length of time (1,2,3,5yrs...)|
|Cost of Investment||Less due to Rupee Cost Avergaing||High, since it's a one-time investment|
What are the various types of SIP?
This investment plan allows you to gradually raise your investment amount, providing you with the freedom to contribute more when you have more income or money to invest. This also aids in getting the most out of investments by making recurring investments in the finest and highest performing funds.
As the name implies, this plan allows you to invest any amount you wish. According to his or her individual cash flow needs or preferences, an investor might raise or reduce the amount to be invested.
This Plan allows you to continue investing after the mandate date has passed. After one year, three years, or five years of investment, the SIP usually comes to an end. As a result, the investor can withdraw the money deposited anytime he wants or according to his financial goals.
What are the benefits of SIP over Lumpsum?
Easier for newer investors: It’s easier and comparatively less risky to invest in SIP since it has outperformed other forms of investments. It also involves a small amount of investment, ensuring substantial gains.
Discipline: If you don’t have many financial experts about how the market works, SIP may be the ideal investment choice for you. You don’t have to waste time examining market fluctuations or determining the best moment to invest. You can sit back and relax since the money is automatically taken from your account and invested in mutual funds.
The Power Of Compounding: A systematic investment plan is a disciplined approach to investing that guarantees you are constantly striving to expand your money. The automation ensures that your contribution grows over time, instead of as a bulk payment where you could forget to spend some time.
Rupee Cost Average: Individuals can also profit from rupee cost averaging with a SIP. When the market is low, fund managers buy more units to lower the per-unit cost of investing. When the market hits its top, these units are sold, resulting in more significant returns.
What are the benefits of Lumpsum over SIP?
Suitable for self-employed individuals: Individuals who are self-employed, as well as those who do not have a consistent source of income, should consider investing in lump sum quantities. SIP’s demand a predetermined amount to be deposited on a regular basis; investors who rely on seasonal incomes may struggle to keep up with the payments of a structured investment plan.
Simple: Lump-sum investments are more convenient since you only have to invest once and see your money grow. You may, however, relax after making a lumpsum investment.
Tax Benefits: Making a lumpsum investment at the beginning of the financial year might enable an investor to receive significant tax benefits under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh from total taxable income, which may be lodged with the Income Tax return. It also provides for higher returns on long-term ELSS investments.
Capital Appreciation: As previously said, lumpsum investments are intended to be held for a more extended period of time, allowing them to grow in the market. Simply put, the wealth invested in a lump sum investment grows in value over time. Furthermore, the lumpsum investment has more time to respond to market developments. As a result, it will be capable of substantial expansion.
Minimum Charges: Because lumpsum deposits are made only once, they have meagre minimum costs compared to ongoing investments. There are cheaper transaction and maintenance expenses with them. SIPs, on the other hand, contain an exit load as well as tax responsibilities, which are not present in lump sum investments. As a result, one may enjoy the benefit of investing a massive sum of money all at once.
SIP or Lumpsum are two completely different forms of mutual fund investments. This adds to the fact that both have their unique advantages and disadvantages. Furthermore, investments are entirely market-driven. The rewards that can be achieved from an investment are determined by market forces. You might expect a more significant return on a lump sum investment while the money market is booming. If you had invested in a SIP during a decreasing trend, you are more likely to get better returns.
Before deciding whether to make a one-time investment or follow a regular investing strategy, you need carefully evaluate a few aspects, such as your financial objective. These elements include:
Ability to take a risk: The main difference between a lumpsum investment and a series of payments is the risk level. Because you only invest a fraction of your whole portfolio with SIPs, you have superior capital protection. Borrowers with a more significant risk appetite might choose a one-time investment, which invests the entire money in one go. It also offers much higher returns than alternative policy options.
Returns: Returns of both types of investment depend on market condition even though SIP generally performs better.
Lock-in period: SIPs and lumpsum investments have differing lock-in durations; SIP’s typically have a 3-year lock-in term that matures in stages, but lumpsum investments are released all at once after three years.