Confused Between SIP & Lump Sum? Here’s a Solution!
It has been more than a decade and a half since SIPs are introduced in India, but still, several investors are still not able to differentiate it from the lump sum way of investments. They are confused that which of the two is a better way of investing in mutual funds. So if you are among those investors and wish to clarify your doubt regarding SIP & lump sum mutual fund investment, then read along to illuminate yourself.
Both the concepts of SIP and lump sum are highly beneficial methods of doing a worthwhile investment. They complement each other and go hand in hand. Where SIP allows the investors to make a regular investment of a certain amount at a prefixed interval of time, lump sum lets them buy the mutual funds by shelling out continually at will. In both ways, the ultimate goal of making a perfect investment is achieved in a hassle-free manner.
Are There Any Differences in the Performance of the Two?
Yes, there are! Considering an uptrend cycle in the market, the returns on lump sum investment turn out more profitable than SIPs. Here’s how - during an uptrend, the SIPs are invested at regular periods ranging from lowest to highest prices, consequently shifting the average cost of investment higher and generating lesser returns; whereas, the entire amount of a lump sum investment is put at the lowest price generating higher returns by exploiting the difference in the lowest and the highest prices to the greatest extent.
Which One of the Two Withstands the Risky Nature of Market?
Withstanding the risky nature of the market is best realised when the investment generates the least drawdown in returns during the negative trend of the market. So if one begins investing periodically in a negative cycle, the investment cost keeps decreasing with the falling prices. This implies that maximum investment is done at lower prices which achieve a lower average cost of investment, decreasing the drawdown effect on the generated returns consequently. However, in a lump sum investment, the story runs similar to its counterpart in the positive cycle – but opposite. Just as a lump sum investment generates greatest positive returns during positive cycles, it is severed equally negative during negative cycles.
“Now that you have understood the differences in the nature of both kinds of investment modes and their respective behavior in the ups and downs of the market, here are some tips to select the best according to your desires, keeping the volatile nature of the market in perspective.”
SIP investment plan is best suited to a regular and disciplined investor with a goal to create wealth over the long term as investing systematically is the best at handling market risk, and generates satisfactory wealth on maturity.
The lump sum is suitable for people with flexibility in investment schedules and with irregular income. However, one must consider the market positions/trends for the right time of entry and exit.
A new investor should not hurry in exiting from a negative market if losses are sustained during initial stages of investment. But, he/she should play along patiently until the market recovers. Moreover, the investor can maximise the returns by grabbing the opportunity of buying more (and cheap) in the troughs.
Whereas, an existing investor should play smartly and must take an exit call if he/she foresees market’s downtrend near the time of maturity of his/her investment. He/she must switch to safer funds (like debt funds) for sustaining least risk on earned money.
So now, we believe you have understood the literal difference between lump sum and SIP and can definitely make a right choice for yourself. If you wish to invest in a lump sum or SIP online, we have several solutions to help you out. Get in touch with our investors’ desk or the Support Desk, to begin investing conveniently.
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