Which is better between SIP and Lump sum?

If you invest the investable amount in a single mutual fund, it is called a lump sum investment. SIP (Systematic Investment Plan – SIP) is a way to invest in mutual funds. With this help, you can invest a fixed amount regularly in the mutual fund scheme of your choice, every day, week or once a month. You can invest in mutual funds both by SIP or lump sum, but which one is better? This question is often asked by investors. Many investors are confused about both. Therefore, information related to this is being given through this article.

Difference between outright and SIP

SIP and lump sum cash flows vary. If you have a lump sum, you can easily invest in mutual funds. If you do not have a lump sum of money, you have no way other than a SIP.

Outright Better sip

The benefit of SIP lies in the average cost of Rs. When the market is weak, you get more mutual fund units and when the market is performing well, you get less units. You can easily average the cost of investing through this. Its concept is quite simple. You get more units at a lower price. Let us understand the importance of SIP through an example. In January 2019, Ramesh bought 1250 units of Scheme XYZ for 40 thousand rupees. She got it for Rs 32 per unit. His friend Suresh has invested in this company through SIP. Now let’s take a look at Suresh’s weighted cost.

Sip date SIP amount Unit price Unit number
15 January 2019 10 thousand 32 312.5
15 February 2019 10 thousand 36 277.777
15 March 2019 10 thousand 30 333.333
15 April 2019 10 thousand 28 357.1428
The total 40 thousand 31 1281

Thus you must have seen that Suresh invests through SIP and buys more units than Ramesh, that too at a lower price.

SIP benefits over lump sum

There are several benefits of investing through SIP as compared to lump sum investment, some of which are –

No need to track the market – Many investors do not know when it is better to invest in the stock market. In such a situation, if you invest a lot of money (lump sum), you are likely to suffer a lot of losses due to fluctuations in the stock market. Conversely your money is invested over time by investing through a SIP, which reduces the possibility of loss.

Get the benefit of market conditions – Through SIP, you make regular investments on a day, week or monthly basis. In this, when the market is weak, you get more units, while when the market is strong, less. This reduces the cost per unit.

Discipline in investment brings – You invest small amounts regularly in mutual funds through SIPs. It forces you to be disciplined in investing and brings discipline.

Better for new investors If you are new to investing, SIP is a great way to start investing. Through this, you can invest in investment options like small amount of equity and understand these.

better performance – Investments made through SIP have consistently yielded excellent returns. You can take a look at the performance of the last 5 years.

Benefits of Compounding – If you invest in a mutual fund through SIP, you can take advantage of returns on compounding or returns.

Less Stress – By investing through SIP, you do not have to worry about market volatility and you are relaxed.

How to invest in ELSS SIP or lump sum ?

Equity Linked Saving Scheme (ELSS) is a tax saving mutual fund scheme. It has a lock-in period of 3 years. ELSS is an excellent long-term investment option. By investing in ELSS, you can get tax benefits of up to Rs 1.5 lakh per year under Section 80C of the Income Tax Act.

For example, both Naveen and Neeraj invest Rs 1.5 lakh in the ELSS scheme. Naveen has made a lump sum investment in the ELSS scheme. This gives him 15,000 units of ELSS fund. Neeraj invests Rs 12,500 per month in ELSS through SIP. It gets 1,250 units.

  • The net asset value (NAV) of the scheme is Rs 10.
  • The NAV fund has a market price per unit.

If there is a steady growth in the stock markets, Neeraj will get fewer units as the NAV increases. The average purchase price of ELSS units will be higher for Neeraj than Naveen. On the other hand, if the stock markets fall, then Neeraj will get more units due to falling NAV. The average purchase price of ELSS units will be lower for Neeraj than Naveen.

Stock markets are known for volatility and risk. SIP is a better choice for these markets than outright. If you are salaried and do not want to take the risk, SIP may be a better approach for you.