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SIPs vs Lump Sum Investments – Which One Should You Go for?

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SIPs and lump-sum investments are methods of investing in mutual funds. As one may expect, both modes of investment come with distinct sets of benefits, influencing factors, and market risks. While SIPs inculcate a habit of disciplined investing and spread risk over time, lump-sum investments in mutual funds allow you to make larger investments in the short run in one go.

Let’s take a deep dive into SIP vs one-time investment in mutual funds and discuss the factors you should consider while choosing between the two.

What are Mutual Funds?

Mutual funds are instruments for investing that pool money from investors having a common investment objective and invest the money in a class of securities ranging from stocks and bonds to even gold. Although the risk associated with investing in the market remains, the risk is spread more and shared by investors, unlike direct investments.

You can make mutual fund investments via two methods: SIPs or a lump-sum investment. Let’s learn more about each investment method in detail.

What is an SIP?

A systematic investment plan, or SIP Investment, is a highly popular method of investing in mutual funds. In SIPs, you make small investments at regular intervals to build a sizeable corpus over time. If you have automated SIP payments, the set amount will automatically be deducted from your bank account on your preferred date.

Discussed below are the major benefits of investing in mutual funds through SIPs –

You can start investing with a low amount
SIPs help you inculcate financial discipline
Help you leverage the power of compounding
Provide the benefit of cost averaging and good returns over the long term

What are Lump Sum Investments?

Lump sum investments, unlike the SIPs, allow you to invest a sizeable amount in one go. However, this can be risky, as you concentrate a large portion in one go or one particular scheme. Typically, lump sum investments should be done after a thorough analysis of a fund or scheme or when you have sufficient experience in the market.

The key benefits of lump sum investments are listed below –

  • Help ride small-term fluctuations
  • Facilitate better control of the investments
  • You won’t need not set aside a specific amount of money each month to invest  
  • When the market is in a bull run, you can clock in significant gains

SIP vs One-Time Investment in Mutual Funds

The points listed below highlight the differences between SIPs and one-time investments in mutual funds in detail –

1. Investment mode

When you invest in mutual funds via SIPs, you make regular investments in a scheme. On the contrary, lump sum mode requires you to invest a large amount in one go.

2. Compounding power

With SIPs, you can capitalise on the power of compounding by reinvesting the fund in the same plan instead of withdrawing it over the long term. This option, however, is not available when you make a lump-sum investment in mutual funds.

3. Flexibility

In an SIP, you can choose whether you want to make investments on a weekly, monthly, quarterly, or annual basis, as per your financial situation and planning. For instance, if you are investing AED 1,500 each month but want to increase the amount from the next month, SIPs would offer you the flexibility to increase the amount.

Lump sum investments can lock your corpus for the time being, which makes them less flexible compared to SIPs.

4. Lower costs

By investing in SIPs, you can benefit from cost averaging. You can lower the overall purchase cost by buying additional units when the market is down, and lesser units when the market is up.

In the lump sum mode, however, you would be required to purchase all the units at the same price in one go. This can turn out to be costlier as you cannot avail yourself of the cost-averaging benefits.

5. Volatility

When you invest in mutual funds via SIPs, you can spread your purchase across regular intervals. Thus, only some parts of your investments are exposed to higher-than-usual volatility.

In lump-sum investments in mutual funds, time always plays a crucial role. As the risk of loss wouldn’t be spread over time, your investment can be exposed to high risk amidst highly volatile markets.

Factors to Consider Before Choosing Between SIP and One-Time Investment in Mutual Funds

Listed below are the primary factors you should consider before you opt for SIPs or a lump sum investment in mutual funds –

  • Availability of funds - If you have a large amount of money at your disposal, you may opt to invest in mutual funds lump sum. However, if you are a salaried employee with a regular income or a steady cash flow, an SIP would be a better option for you.
  • Market timing - There is a significant volatility risk if you make a one-time investment, particularly when investing in equity funds. On the other hand, when you invest in mutual funds via SIPs, the risk of market volatility is distributed over time. Typically, SIPs are safer when investing in turbulent markets. On the contrary, lump sums can garner good returns in a bull market.
  • Discipline - It is well known that SIPs can help you achieve financial discipline and freedom early on if you make a habit of them. This is not the case with lump sum investments, as you would be investing only at certain times.

Note: Whether opting for SIP or lump sum, deciding the type of investment is crucial. Equity investments carry a higher risk than debt investments. So if you are a risk-averse individual looking to clock in decent returns, you can opt for debt mutual funds. However, if you can take on higher risk, mutual funds having a larger share of investment in equity instruments can bring in greater returns.

Key Takeaways

Mutual funds can help you diversify your investment portfolio and clock good returns in the long run. You can invest in a mutual fund either through an SIP or a lump sum as per your requirements and financial conditions. Both methods have their advantages and disadvantages in terms of risk, frequency, and more. It is essential to analyse your risk appetite, income, financial goals, experience in the market, and more before selecting one of these investment methods.

Here are some frequently asked questions related to SIPs and lump sum investments in mutual funds –

FAQ's

Q1. Are SIPs risk-free?

Ans: No, SIPs are not completely risk-free. As you would be investing in mutual funds schemes via SIPs, which are related to the market, your investments would be subject to market risks.

Q2. Is SIP better than FD?

Ans: SIPs can build a large corpus for you over time while being less risky than direct investments in stocks. With that said, FDs may be a better investment option for risk-averse individuals who want to earn a fixed return without any risk.

Q3. Who should invest in a lump sum?

Ans: Individuals who don’t have any major expenses expected in the future, have a high-risk appetite, and have considerable experience in the market can look to invest in a lump sum.

Q4. Are SIPs better than lump-sum investments?

Ans: SIPs offer better cost averaging than lump sum investments and can also help inculcate financial discipline in you. However, lump sum investments can be suitable if you are an experienced investor and can tolerate high risk. Ultimately, the choice depends on various factors like your income, experience, risk tolerance, and more.

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