Which is a Better Investment Option - SIP or Lumpsum?

Sip vs Lumpsum Investment

When we invest in mutual fund there are two choices, You can either opt for a lumpsum investment, where you invest the entire capital in one go. Alternatively, you can opt for a SIP investment where you phase out the investment. Lumpsum investing is a lot simpler and you can use any lump sum SIP calculator to calculate how they will differ. SIP Plans and SIP benefits are more about discipline and about syncing your investments with your inflows. 

However, it is not that lumpsum investing is a bad idea. In a directional upward trending market, lumpsum investing works better than a SIP. You can see the list of best mutual funds for lumpsum investment and you can get a veritable list of long term winners. In fact, it can be a good idea to look at the best mutual funds for 1 year lump sum investment since over shorter periods, SIPs don’t work too well.

Which is a better alternative?

Before we arrive at a conclusion let us look at some typical facts. Lumpsum investing works well when you are in a directional market that is headed up. Also, the index movement should be around 40-50% to be able to really make some reasonable profits on lump sum investments. Normally, you get to see periods of upward trending market for a period of 5-6 months in a span of 5 years. Even then, you must be smart and lucky enough to catch the bottom and hold till the top. In short, the probability that you can make profits through lumpsum investing is quite low. Odds are stacked against you.

That is where SIPs come in. During falling markets or in markets that are non-directional or in markets that are volatile in a range; it is SIP investing that works better due to the power of rupee cost averaging. Also, SIPs sync with income flows. You don’t earn in lump sum but in steady flows on a monthly basis. By opting for a SIP, you don’t put too much pressure on your cash flows. That is the role that SIPs play in wealth creation.

Why there is a case for SIPs over lump sum investing?

SIPs actually solve a number of problems that investors face. Let us look at a few of them.

1) You cannot start with the assumption that investors are loaded with cash. More often than not, they are not loaded with cash. In such conditions, they need an investment product that entails a small unit investment and syncs with income flows. That is where the SIP fits perfectly into the picture.

2) You will be surprised to know, but SIPs are natural risk mitigators. Here is how it works in practice. You are not always right in your choice of investments so in the case of SIPs, your commitment is limited to begin with so you can take remedial action without too much of cost. It is a trade-off. You cannot wait too long to have a corpus and when you have a corpus, you can cannot risk too much of it. SIP solves this dilemma.

3) SIP instils discipline and this role of SIPs is often overlooked. It is apparent that investors accumulate wealth through SIPs due to only one factor and that is discipline over time. In a situation where the temptation to digress is quite high, the SIP brings that quiet discipline into your investment model. For instance, when the money is auto-debited from your bank account every month, you also practice financial discipline.

4) The truth about stock markets is that it is short periods of directional movement, longer periods of volatility and substantially longer periods of tepid movements. It is tough for any investors to be able to time lump sum investments in such an unpredictable market. The SIP, being what it is, does away with the need to time your entry and exit. The auto nature of the SIP ensures that wealth creation is on auto mode.

You don’t have to be rich to invest in mutual funds. You just need to start with systematic investment plans (SIPs). They are more pragmatic and more profitable option in the long run.