SIP vs Lumpsum Investment are the ways to invest in mutual funds. SIP is the regular deposits of amount in mutual fund every month to get mutual fund units based on the NAV (Net Asset Value). Lumpsum Investing is like one time investment you make with huge amount of your choice when you see the future growth of mutual fund based on various factors and economy. Regular SIP is better for long term goals while making lumpsum investments when markets go down also gives you good returns when market recovers.
Let us understand more about SIP vs Lumpsum Investment in Mutual Fund in detail.
- SIP vs Lumpsum Calculator Video
- What is SIP Investment
- What is Lumpsum Investment
- SIP vs Lumpsum Which is Better?
- Difference between SIP and Lumpsum Investment
- Frequently Asked Questions
SIP vs Lumpsum Calculator Video
What is SIP Investment
- SIP full form is Systematic Investment Plan. SIP is a way to invest in mutual funds where your bank account is debited every month based on your investment amount set by you and invested in mutual fund of your choice
- It works in a way similar to Recurring Deposits, where you gradually accumulate money to reach your financial goals
- Foe new investors, it is better to start SIP to achieve your long term goals. it is also important to define your goals before starting SIP, so that you stick to your investment journey
- When starting SIP, your goals should be of at least 5 years tenure so that you give time to the market. In short term, good returns are not guaranteed and hence you need to give time to the market to help grow your money invested
- SIP helps you to get Rupee Cost Averaging benefit, which means when market goes up (high NAV), your number of mutual fund units are less on your deposit amount and when market goes down (low NAV), the number of units in mutual fund you buy is high thus accumulating more units in your account
- NAV or Net Asset value is calculated every day at the end of day based on which your number of units are calculated with the help of deposit amount
- So new and long term investors should go for SIP in order to start their investment journey and achieve financial goals
- You can use the SIP Calculator to calculate how much returns you can get over a period of time
What is Lumpsum Investment
- Lumpsum investing is the one time investment you make in mutual funds, stocks or any other investment product
- This one time investment can be very risky if you buy mutual funds when they are at all time high, since there is an expectation for stock market correction in near future
- Lumpsum investing should be avoid by new investors as it can lead to negative returns over short term thus investors taking emotional decisions of selling mutual fund with a loss
- As an investor, you should make lumpsum investments only when the markets are down and everyone is in fear. This is the time when you should get greedy and make lumpsum investing against the crowd to accumulate more units over long term
- You should be greedy when others are in fear, and you should fear when others are greedy
- Use the Lumpsum Investment Calculator to know returns over long term
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SIP vs Lumpsum Which is Better?
For new and long term investors, SIP is mutual funds is better to accumulate amount over long term and also balance the risk with the help of Rupee cost averaging. Your aim should be to be consistent in your investments in a good mutual fund to accumulate wealth over long term.
While you continue making SIP investments for 2-3 years, it’s time that you should test you patience by doing lumpsum investments as well. You should make lumpsum investments only when markets are low and not at high. Because when market goes down, there is a tendency that it will come up in few months or years for you to book good profits.
While we cannot time the market to know the exact lowest point, but you should be ready with your lumpsum amount to invest during market downturns.
So SIP and lumpsum investing, both are good, provided you use both these strategies wisely to achieve your financial goals.
ALSO READ: SIP Returns Calculation in Excel
Difference between SIP and Lumpsum Investment
Below are the key differences between SIP and Lumpsum Investments:
|Regular deposits in Mutual funds on monthly basis
|One time investment in mutual fund
|Benefit of Rupee Cost averaging – buy more units when markets are down and less units when markets are high
|No benefit of Rupee cost averaging. Risky for short term
|Reduces your risk while doing SIP for long term
|Good when you make lumpsum investment when markets are down
|Best for new and young long term investors and experienced investors as well
|Not good for new investors. Experienced investors can make lumpsum investment to achieve goals before time
So to summarize, SIP and lumpsum investments both are good based on the strategies you choose. For new and young investors, SIP is better to slowly accumulate wealth using mutual fund market and get some experience of how it works, where as for experienced investors, SIP along with lumpsum investing when market are down (bear market) is better to achieve their financial goals before time.
It is important to note that you should have a financial goal before starting SIP or lumpsum investing, and when the goal is achieved, you can stop the investments and redeem required amount. Not having specific goals can lead you to losses by taking emotional decisions. Give time to the market to get better returns and avoid short term investing in mutual funds.
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Frequently Asked Questions
Which is better SIP or one time investment?
Both SIP and One time investment is better based on the circumstances and your financial goals. As an investor, you should start with SIP and regularly deposit amount in mutual funds. When the market goes down due to correction or other factors, make lumpsum investment to get more units which will help achieving your goals before time. Avoid short term investing in mutual funds.
WHY SIP is better than Lump sum in long term
SIP is better than lumpsum because it helps you to buy units during market ups and downs thus providing the benefits of Rupee cost averaging. This benefit is not available in lumpsum investment. So even though you cannot make lumpsum investment when market goes down, still you should continue SIP which will buy mutual fund units at cheap rate, hence SIP is always better for new and experienced investors.
Is SIP safe for long term?
Mutual funds are subjected to market risks, so it depends on the mutual fund you select. Historically we have seen the markets move on top with time, but a bad mutual fund investment can impact your returns, SIP can be safe if you select a good mutual fund and invest for long term of at least 5 to 7 years.
What are the disadvantages of SIP?
SIP is slow and gradual process of accumulating wealth and this is the only disadvantage of SIP is the age of reels and shorts where young investors don’t have patience to achieve their goals. We cannot exactly say that it is a disadvantage, but kind of limitation and this is how it works. Slow and steady wins the race!
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