SIP stands for Systematic Investment Plan where you invest in an equity fund at regular intervals of time. Lumpsum stands for investing the entire sum you planned to invest in one go. Let’s look at both the options.
If you are new in the market and do not know when to enter (remember that in the market, timings are what matters most), SIP is usually the course taken by most people. Why?M
1.Minimizes the risk
Let’s assume you invested Rs. 10,000 during the peaks of the market and the next day market goes down by 30%, you have already lost Rs. 3000. Consider a SIP where you invested Rs 5000 during the beginning of the first month and another Rs. 5000 in another month. The market went down by 30% in the first month and recovered by 10% during the second month. This makes your investment amounting to Rs. 3500 at the end of the first month but Rs. 5500 during the second. Taken for two months, investing in lump sum amounted to the total balance of Rs. 7700 at the end of two months while through SIP, it was Rs. 9000.
2. Help you take advantage of the market
Sometimes when you buy, the market is weak and hence you can buy more stocks at low prices and in times when the market is strong, you might be able to buy less for more. This is what SIP takes advantage of and however hard we try, the one thing that somebody cannot time accurately is market. Certainly, some prediction can be made, but nobody can take care of all the endless things that can suddenly change the weather in the markets. SIP is a smart way of taking advantage of these golden times. This is also called rupee-cost averaging much for the same reason explained above.
3. Makes you a saver
Taken a chunk of your hard earned money every month and putting it up for investment that could otherwise have bought you a delicious pizza is hard but yes, if you go for a SIP, it just gets done on fixed dates. The fund manager takes the share it owes making you a habitual saver.
But the choice of SIP over lump sum is more of a psychological choice than the return for investments. People who would have invested lump sum during the times when the market was falling and finally crashed, they would be wary of taking such a risk again. But, eclipses are not an everyday event.
Consider an example. Let’s say Mr A has Rs. 4, 00, 000 to invest. Similarly, Mr B also wants to invest Rs. 4,00,000. Mr A put his money into the equity fund a lump sum with an average return of 15%. His invested capital at the end of 4 years would be 7 Lakh. Mr B, however, puts his money into the equity fund as SIP, investing 1 lakh every year. His return at the end of four years would be 5.74 lakh invested at the same average rate of interest.
In market essentially, it more about the time that the money stays invested which decide the returns. In lump sum, 4 lakhs was invested for entire 4 years that generated 7 lakhs. In SIP, 1 lakh was invested for 4 years, another 1 lakhs for 3 years, and other 1 lakh for 2 years and the remaining sum for 1 year pulling down the overall return on investment.
Though this is a never-ending discussion, choice of SIP over lumpsum is essentially about the financial choices of the individual. If I am not sure of the total balance in my bank account every month, SIP is out of the question while if I am a not so rich with a large capital at hand, the lump sum is out of the question.
Return is obviously subject to the volatilities of the market but the longer you stay invested; the more returns you can expect. SIP and lumpsum both are good means of investing your capital in markets, your choice depending on the amount of capital in your hand, the time for which that capital won’t be needed to meet your emergency needs and the degree of risk you can afford with your money.
Important note: As per the performance statistics of the leading long term equity mutual funds like Axis long term equity fund or Principal hybrid fund, for example, the return for lump sum over the period of 3 to 5 years are higher than those for SIP.