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SIP vs Lump sum

  • Nirav Karkera
  • Jan 12 2022
  • 8 minutes
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The recent pandemic has had a lasting impact on many families. While there has been loss of life there has also been a loss of income for the majority of families. This has been one of the major contributing factors for the entry of new investors into the mutual funds market. 

Investment in mutual funds is very easy and is one of the many ways to maximise investor’s wealth gradually in the long run. Investors can start their mutual fund portfolio through SIPs or a lump sum investment. 

Given below is the meaning of each of these modes and their relevant details that can help investors make an informed decision.

What is the SIP mode of investing?

SIPs have become a very common term in our day to day life. They are the simplest mode of investment in the mutual fund market. A SIP (Systematic Investment Plan) requires the investor to invest small and consistent amounts in the fund which gradually leads to an increase in the investors wealth. An investor can start SIPs with amounts as low as Rs. 100 or Rs. 5,000 depending on the fund.

This amount is deducted from their registered bank account every month at a fixed date. The number of units allotted to the investor against their SIP each month depends on the current market price or NAV of the fund. 

What are the benefits of investing through SIP?

Investment through SIPs has many benefits for investors, some of which are discussed below.

a. Affordability

SIPs have made it possible for even the smallest of investors to enter the mutual fund market who may not be able to take a huge plunge but can gradually build their portfolio through systematic or periodic investments and enjoy the benefit of compounding. Most mutual funds allow the investors to start a SIP with nominal amounts like Rs. 100 to Rs. 5,000 depending on the fund guidelines. It, therefore, does not make a huge dent in the investor’s pockets and helps them manage their financial commitments in a better manner.

b. Rupee cost averaging

Rupee cost averaging is another important benefit of the investment through SIPs. under SIPs, the investor gets to purchase the units of the fund at different NAVs prevailing on the date of SIP. This leads to an overall reduction in the average cost of purchasing the units which is also known as the rupee cost averaging.

c. Flexibility

Flexibility is another key element of investment through SIPs. Investors are relieved of the burden of timing the market to earn maximum returns. Also, SIPs allow the investors to increase or decrease their investment at their convenience or exit the mutual fund market easily without any excessive compliance burden or additional cost. This makes it more favourable for the small investors who may have other financial obligations and may need to alter their SIPs at some point in time. 

d. The discipline of savings and investment 

One of the prime advantages of SIPs is inculcating the habit of saving and investing. It is quite essential to start saving and investing at the earliest to multiply the investments and maximise the power of compounding. Investing through SIPs requires the investors to make smaller but regular investments in their mutual fund account. This ensures that the investors have the chance to plan their expenses and provide for the SIP deduction from their bank account each month. 

What is lumpsum mode of investing?

The lump-sum mode of investing is the opposite of the SIP mode of investing in mutual funds. While SIPs allows the investors to make smaller but consistent investments in the fund, lump-sum investment mode allows the investors to make a one-time investment in the fund and enjoy the returns from their investment. This type of investment mode is ideal for seasoned investors who have more knowledge of the mutual funds market as well as more funds at their disposal to make a lump-sum investment. 

What are the benefits of investing through lumpsum mode?

Like investment through SIPs, lump-sum investment also has many advantages. Few advantages of investment through lump-sum investment mode are discussed below. 

a. Better control over investments

This type of investment is favoured more by seasoned or well informed and experienced investors. They can make their investment decisions without the need to rely on the fund managers. It allows them to decide on the amount of investment as well as the choice of investment at their discretion based on their research and analysis of the market.

c. Increased benefit of compounding

Compounding is the single most important tool to increase the investor’s wealth at a faster pace. Mutual funds are an excellent example of an investment option that relies on the power of compounding to maximize an investor’s wealth. This benefit is further enhanced when the investment is made in a lump-sum mode as against a SIP mode. This is based on the simple principle that if the base or primary investment is higher then the multiplying factor will be higher. Hence, the benefit of compounding is increased exponentially in lump-sum investment mode.

d. Helps the investor take advantage of the market timings

The lump-sum investment option also allows the investor to take advantage of the market timing and enter and exit the mutual funds at the most appropriate time to maximize their returns. For example, in a falling market, investors can get more units of the fund and can eventually earn higher returns in the lower capital investment. 

e. Better performance than SIPs in a bull market

Another advantage of investing through lump-sum investment mode is in the bull market. Investors get the benefit of increased returns from the start of their investment in the bull market as compared to investment through SIPs where the amount invested in the later stage of the bull market will have limited time to grow. 

Which is a better mode of investing?

SIPs and lump-sum investment modes both are excellent investment options for the mutual fund market providing their own set of benefits. SIPs help to gradually build the investor’s portfolio and increase the investor’s wealth in the long run and lump-sum investing gives a kickstart to the investment portfolio especially in the case of well-experienced and informed investors.

The choice of the investment mode between the two will depend on multiple factors like investment goals, knowledge and experience of the investor, risk and returns perception and most importantly investment budget. Understanding these factors will help the investor make an informed investment decision that can suit their investment strategy or investment style. An ideal portfolio can be a combination of the two modes of investment to gain the benefits of both and increase the earning potential of the investor’s portfolio. 

Conclusion

As mentioned above, SIP and lump sum investing can be opted by investors based on many underlying factors. Investors have to also understand the basic advantages of these modes to ensure that they gain maximum return on their investment. For example, in a bullish market it is better to invest in lump sum mode to gain maximum returns while in a volatile or bearish market, SIPs can help in gradually increasing the returns on investment.

FAQs

1. What is the mode of investment in case of SIPs?

A. SIPs require the linking of the investor’s bank account with the fund and making the investment through an auto debit from such account at the fixed date of SIP for a fixed amount. 

2. How are SIPs taxed?

A. SIPs are taxed based on their period of holding as well as the type of fund (equity fund or debt funds). For example, an equity SIP held for a period of more than 12 months will be taxed as long term capital gains whereas a debt fund SIP held for a period of less than 3 years will be treated as short term capital gains.

3. How to invest in SIPs through Finity?

A. Finity is an excellent platform for investment in equity, debt or hybrid funds through SIP. The process for investment in SIP through Finity is mentioned below.

  1. The first step is to login into the Finity account using the login credentials. 
  2. Select the type of find to be invested (equity/ debt or hybrid funds)
  3. Select the sub-categories from the type of fund selected above.
  4. The next step is to select the particular fund from the sub-categories.
  5. Following this, the investor will have to select the mode of investment as SIP and then enter the amount to be invested. 
  6. After making the payment through any of the available online modes, the investment will be reflected in the portfolio of the investor.

4. How to invest in lump sum mode through Finity?

A. The steps to invest in a lump sum mode in mutual funds through Finity are given below.

  1. The first step is to login into the Finity account using the login credentials.
  2. Select the type of fund (equity/ debt or hybrid funds).
  3. The next step is to select the sub-categories from the type of fund selected above.
  4. After this, the investor will have to select the fund name to make the investment.
  5. The investor will be given the option to invest through SIP or Lump sum and here the investor will have to select the lump sum mode.
  6. The investment will be shown in the portfolio section of the app after making the payment for the amount of investment.
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