We all are well aware of the two methods of investing in mutual funds, i.e. Lump Sum and SIP. Numerous factors decide whether you should opt for a lump sum or SIP. If you’re in a dilemma deciding which is right for you, you are in the right place.
In this blog, we’ll have more significant insights into both of these methods, see the difference between the two and analyse which one is better for you.
What is a Lump Sum investment?
A lump sum investment in mutual funds means that investors can buy certain units of mutual funds in one go by paying a lump sum amount. This method is preferable among investors when the Net Asset Value of the MF’s units is less. Lower the NAV of the MF units; more units can be purchased with the same amount. However, if the NAV is high, the same amount can buy fewer units.
Benefits of lump sum investment:
- Best for putting or managing your windfall gains
- Investors have better control over the funds invested
What is SIP investment in mutual funds?
A systematic investment plan allows investors to allocate a smaller amount of funds periodically towards a particular MF scheme. There is a systemised manner of investing at regular periods. These periods can be monthly, quarterly, half-yearly or yearly. Once you subscribe to an MF scheme through SIP, a certain amount will be debited from your attached bank accounts after a certain period. This technique is often opted for by individuals who want to build wealth gradually and build a habit of investing.
The benefit of SIP over the Lump Sum method is that you, as an investor, need not have huge funds to invest. Rather, you can start with even as low as Rs 500 a month.
Benefits of a SIP investment:
- Investors experience massive gains when compounding comes into effect
- Less investment is required to get started
- Investors benefit from Rupee Cost Averaging
- Highly flexible
What is the difference between SIP and Lump Sum?
Minimum Investment Amount
SIPs can be started with as low as Rs 500 monthly. On the other hand, investors need to make a minimum investment of Rs. 5000 when investing in mutual funds through the lumpsum route.
Market volatility
In case of SIP, investments take place irrespective of the market volatility. It is because it is an automatic process and investors don’t have to take investment decisions every month. However, as lumpsum investment is an active decision, there is high probability that the current scenarios might have an impact on the investment decision.
Financial discipline
SIPs develop a sense of financial discipline among investors as a certain amount is deducted from the bank accounts each month, quarter or year as per the policy. But since the investments are made in one single go in a lump sum method, a habit of investing may or may not develop.
Conclusion: which one should you choose?
In finance, there is no technique wrong. It’s just that the one that doesn’t align with your goals isn’t ideal for you. Both these techniques cater to different categories of individuals. Some people may find SIP beneficial while few may opt for the lump sum method. However, you may even choose a combination of two as per your requirements and goals. The key is to start as early as possible.
FAQ
Quick, blog-friendly answers to common questions.
A Systematic Investment Plan (SIP) is a way of investing a fixed amount in a mutual fund at regular intervals, usually monthly. In real market conditions, SIPs spread your investments across different market levels. When markets are higher, the same amount buys fewer units. When markets are lower, it buys more units. Over time, this can help average the purchase cost.
SIPs can be useful during volatile phases because they reduce the pressure to time the market. You keep investing through ups, downs, and sideways phases with the same routine. Instead of reacting to daily market movement, SIPs help maintain consistency and stay aligned with your objective.
Compounding is when your returns start generating returns of their own. In the early years, growth looks slow because the base is small. Over time, as the base grows, even the same rate of return can create larger gains—this is the “snowball” effect.
The key drivers are time, consistency, and patience. Start early, invest regularly, and avoid interrupting the process. Compounding feels quiet at the start and becomes meaningful when it gets time to work.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully.
