Mutual Funds: SIP or Lumpsum, Which is Better?

You as an investor start your investment journey and probably choose Mutual Funds as one of your investment option. But there is always a big question comes in front you that you have chosen the investment instrument i.e. Mutual Funds but through which route you should invest? It means Destination i.e. investing in Mutual Funds is finalised but the route to reach that destination is still a question. There are 2 routes of investing- one is SIP and other is Lumpsum investing. After reading further you will be sure that which route is better for you and how you can maximise your returns. So let’s compare them in detail-

SIP and Lumpsum investment: First, SIP is Systematic Investment Plan in which you invest in a particular Mutual Fund periodically for fixed intervals; mostly it is monthly. The other route is Lumpsum investment, in which the whole amount is invested in one shot. These are 2 routes to go for investment; both have their own benefits and suitability to an investor.

SIP benefits: There are mainly 4 benefits of doing SIP-

  1. Low Investment amount– When you do SIP, you can start with a Low amount as low as Rs. 100 and that gives you motivation to keep going your investments for longer duration.
  2. Market tracking is not required– Best thing about SIP is– you don’t have to try one of the hardest thing i.e. market tracking. This makes SIP as a peaceful investment journey.
  3. Cost averaging– When you do SIP, whether market is Bullish or Bearish you are keeping your investment intact. Hence, it does the cost averaging and Capital loss chances in long term reduce significantly.
  4. Makes you a disciplined investor– In its name, it is Systematic and hence it makes your habit to save and invest. It is most disciplined method of investment.

Lumpsum investment benefits: Lumpsum investment has mainly 2 benefits-

  1. Saving and investing in one go– It is beneficial when you get some good amount, let’s say some form of performance bonus or you cracked a good deal and you now want to invest it. Since, there is tendency to spend that money whenever you get some windfall amount but going for Lumpsum investment will reduce chances of any unnecessary expense.
  2. Generates excellent return, if entry is correct– If you know how to time the market or you know right time of Entry, Lumpsum investment can give you a very good return. But in reality it is very difficult to time the market even experts use to believe that this is the most difficult thing. So to take this benefit, you must be sure that you can enter at right time with your Lumpsum investment.

Comparison with an example:

Now let’s understand SIP and Lumpsum with actual data of a Mutual Fund and see the 360 degree comparison of SIP and Lumpsum investing.

Let’s take an example of a real time data of an Index Mutual Fund – HDFC Index Fund S&P BSE sensex plan.

Let’s say, you are an investor and you got a Lumpsum amount of Rs. 1.2 Lakh as your performance bonus in anywhere in year 2021 and you want to invest it in HDFC Index fund. Now consider 2 cases below-

Case 1- You invest it on day, 18th Oct 2021 when the NAV was highest for year 2021, at that time the NAV value was 563.66 so you will be allocated 1.2 Lakh/563.66 = 213 Units. If you are thinking why someone invests at this high level, it is quite possible. Because when NAV is rising many investors get optimistic and most of the investors follow the euphoria of market use to invest around All Time High levels.

SIP units
SIP units

Case 2– If you got lucky and you choose a day NAV was lowest for whole year. You invest it on day 31st Jan 2021, at that time the NAV value was 419.78 so will get 1.2 Lakh/419.78 = 286 Units.

SIP Units
SIP Units

You can see difference of Units is 286-213 = 73. In First case, even after one year on 18th Oct 2022, the Value of 1.2 Lakh was Rs.1.17 Lakh, it means you are losing your capital while in Second case the value after one after one year on 30th Jan 2022 was Rs. 1.49 Lakh. This shows that when you go for Lumpsum investment, you should know how to time the market i.e. the right ENTRY point. Else you may loss one or two years of compounding of your wealth. It is not recommended to beginners to time the market as it is one the most difficult thing to do. But in second case if you get lucky to invest somewhere at bottom of the market it will fetch you good returns. But good investors do not rely on luck.

Now if you would have done the SIP of same Rs. 1.2 Lakh for whole year by investing 10000 per month starting from Jan, 2021 on 10th of every month. At the end of the year you would have accumulate 246 Units. You can see your cost is average out and this is how your Losing out chances in SIP is almost NIL.

Investment Mode Units in whole year of 2021
1.2 Lakh on 18th Oct 2021, 52 week High Lumpsum 213 Units
1.2 Lakh on 31st Jan 2021, 52 week Low Lumpsum 286 Units
SIP Rs. 10000 every 10th of month SIP 246 Units


One Pro Tip for each Lumpsum and SIP:

Lumpsum- If you want to go for Lumpsum investment, then you should wait for Bear market when everyone is selling and then invest. Till then you should park your money in Debt funds and fetch the 7-8% interest. In this way you will be growing your Capital even when you are waiting and chances of spending that money are also low.

SIP- If you don’t want have time and energy to track market and want to invest the whole amount through SIP, you first park the whole fund in one good Debt fund and then use STP (Systematic Transfer Plan) to invest in the Mutual Fund scheme of your choice. In this way your money which is not invested in Mutual Fund scheme is also generating returns from Debt funds.

Which is Better, choose one: Lumpsum investment is better only in case when you can do research in order to time the market. But you don’t want to go into this complexity and want to do discipline investing, SIP is better. Historically, SIP is always a better option than Lumpsum for investing in Mutual Funds.

Concluding thoughts: Whenever you got a good amount in one go for any reason, it is good to spend a small portion in celebration but it is better when a big portion is invested to increase your Capital. The route can be any SIP or Lumpsum but destination should be “Investment”. Happy Investing.

Finance Tapasvi

Kapil Khatri

I write about Finance, Economic and Social issues. I also write on topics which have public importance.

Leave a Reply

Your email address will not be published. Required fields are marked *