Lumpsum vs Monthly SIP: What You Need to Know

Lump sum and SIP are the two types of investment payments for buying mutual fund equities. A lump sum refers to an investment payment where the investor is ready to invest a large amount of money at one go in equity mutual funds. Lump sum suggests that the investor has enough cash in hand to invest in an equity share. A one-time investment of Rs.1,20,000 yearly is, generally considered as a lump sum. This investment will have higher returns with a high risk of market volatility.

A monthly SIP or Systematic Investment Plan is when the investor invests a small amount of money over time. This suggests that the investor has a systematic surplus of cash flow which is expected to be available in the near future. For example, A total investment of Rs.1,20,000 in a year can be made by making deposits of Rs.10,000 each month. This is an ideal choice for investors who cannot afford a lump sum amount of money at a time.

Lump-Sum Vs Monthly SIP

SIP’s and Lumpsum investments are both equally profitable and can help in creating wealth. However, there are various differences between these two investments plans and it is suggested that you consider the following scenarios before investing-

Market crash differences

The market volatility makes less difference in affecting your investments in a SIP. With investments in periodic gaps of time, your investments will be spread across the market and will endure fewer losses during a market crash. On the other hand, A lump-sum investment can be stressful as during a declining market value, the investments made can incur significant losses.

Profit differences during a crashed market

SIP allows you to invest your finances at different levels of the market cycle. Your fund analyst will buy more stocks during a low market value and will sell those stocks during the high market value. This situation is called Rupee cost averaging.  On the contrary, when the market is down a lump sum investment will allow you to buy more units of equity and could generate enough returns after the market gets back to its desired position.

Short term investments

Investing in SIP will build your habit of monthly saving and will allow tax saving in different schemes of the market with short term investments. A Lump sum investment is not an ideal investment for investors seeking short term returns.

Long term investments

SIP investments can guarantee higher returns in the long term period of investment. A five-year investment plan is the minimum investment period where an investor could expect profit returns. A lump-sum investment is an ideal investment for people who are looking forward to a long term investment with higher profit margins to achieve long term goals such as a child’s marriage, or for retirement plans, etc.  sum This type of investment is generally for a period of 10-15 years.

Market volatility

SIP’s are less stressful assets and can stay invested during a declining market value and still can be returning some profit, and this is because your investments have been averaged out and they continue even when the market is crashing. Lump-sum investments are generally chosen by high net worth individuals and hostile investors who can take the risk of total loss in their investments and generally expect higher returns during a rise in market value.

Payments

After investing in SIP’s, the monthly investment amount is automatically deducted from the bank account within a designated date throughout the year. Lump-sum investments are a one-time payment. After you invest in mutual funds you can stop worrying about any future payments. This type of equity payment is considered by many investors as a convenient way of managing funds

A smart investor will always try to find new ways to reduce the drastic impacts of market fluctuations. The most elegant way of doing the same is to choose a SIP over a lump sum. You could also split up your investments and put your money in both investment plans.

An investment of Rs. 12 lakhs for a period of one year during a rising market trend will bring Rs.17.60 lakhs if invested in lump sum and Rs.14.90 lakhs in SIP. An investment of Rs. 12 lakhs for a period of one year during a declining market trend will lower down the investments to Rs. 11.91 lakhs in a lump sum and would give a meager profit of 12.03 lakhs in SIP.

Percentage of returns vary because in a SIP because the amount is invested in smaller chunks over a period of time, but in the cases of lump sum amounts, the amount is invested in a single go at the beginning which gives the invested amount proper interest rates and a better chance to get higher returns.

Hope this gives you a fair idea on how to invest in equity during times of risk. Go explore!

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