There are two major methods of mutual fund investment – SIP and Lump Sum. SIP is easier for regular small investments, while Lump Sum gives higher returns for lump sum amount. Investors should choose the option according to their financial situation and goals.
Mutual Fund: In today’s time, mutual funds have become a popular option for investors. This investment is not limited to safe schemes only, but there is also a possibility of getting good returns in it. Mainly two methods are adopted to invest in mutual funds – SIP (Systematic Investment Plan) and Lump Sum. But the question arises that which method is more beneficial for investors. In this article we will compare both the methods and understand which option will be right in your situation.
What is Lump Sum Investing?
Lump Sum means that you invest a lump sum amount in a mutual fund. This method is more suitable for those investors who have sufficient funds to invest. The advantage of investing in Lump Sum is that your capital remains in the fund for the entire time and the effect of compounding is visible quickly. This means that the earlier you invest, the higher your returns can be.
Key features of Lump Sum Investing are:
- A lump sum amount is invested.
- Investing for a long time gives the full benefit of compounding.
- There is a possibility of big returns right from the beginning.
What is SIP investment
SIP i.e. Systematic Investment Plan is a method in which you invest in mutual funds in small installments regularly. This method is easy for those who do not have a large lump sum amount but want to save and invest regularly. The biggest advantage of SIP is that you can invest according to your monthly budget and savings.
Features of SIP:
- Investment is made in small installments.
- Regular investment creates discipline among investors.
- The impact of market fluctuations is less felt.
- Comparison of SIP and Lump Sum: 10 Year Example
Let us take an example to understand the benefits of investing in mutual funds. Suppose the investment return is 12% per annum and the investment period is 10 years.
SIP investment calculation
- Monthly investment: Rs 5000
- Investment period: 10 years
- Estimated Returns: 12%
If a person does a SIP of Rs 5000 every month for 10 years, the total investment amount will be Rs 6,00,000. According to 12% return, the total value at the end of 10 years will be approximately Rs 11,20,179. The total return in this investment will be Rs 5,20,179.
Lump Sum Investment Calculation
- Lump sum investment: Rs 6,00,000
- Investment period: 10 years
- Estimated Returns: 12%
If a person invests Rs 6 lakh in lump sum for 10 years, the total value at 12% return will be Rs 18,63,508. The only return in this investment will be Rs 12,63,509. This shows that Lump Sum investment can give higher returns than SIP in the long run.
Which option is right for you
If you have lump sum money to invest, then Lump Sum investment will be beneficial for you. The advantage of this is that your money will remain in the fund for the entire time and the returns will increase rapidly.
If you do not have money to invest a large amount immediately, SIP is the best option. Investing in regular installments will give you financial discipline and you can invest as per your budget.
Advantages and disadvantages of SIP and Lump Sum
Benefits of Lump Sum
- The benefit of compounding is available on the entire investment.
- Get full benefit of market growth.
- Returns are higher in the long run.
Disadvantages of Lump Sum
- Investors may suffer losses during market decline.
- More amount is required in the beginning.
Benefits of SIP
- Regular investing brings financial discipline.
- Easy way for small investors.
- The impact of market fluctuations is less.
Disadvantages of SIP
- The total return may be less than the lump sum.
- The effect of compounding is less felt in the long run.
Comments are closed.