Where should I invest: SIP or Lump Sum?

You can invest in a mutual fund either in two ways – lump-sum and SIP. There is a similarity in both methods of investment and they work closely. You can choose one method as per your convenience and understanding.

Systematic Investment Plan (SIP)

SIP or Systematic Investment Plan is a smart way of investing in a mutual fund. SIP allows investors to make a small periodic contribution (monthly or quarterly basis) instead of a one-time or lumpsum investment. You can make an investment of, say, Rs. 15,000 ten times over the course of time rather than investing Rs. 1,00,000 in one go. Through SIP, ordinary investors with low income can also make a contribution to a mutual fund. You are allowed to invest a small amount as low as Rs. 5,00 or Rs. 1000 per month rather than making a big investment in a single attempt.  

You can invest smartly in SIP funds by taking simple and systematic steps. First of all, you need to choose the amount you want to and can invest periodically into the target mutual funds based on your cash flow and savings. Once you choose the amount, it will remain the same irrespective of the market turmoil. If you choose to make a contribution, for example Rs. 5,000 per month, into equity mutual funds through SIP, your account will be debited with Rs. 5,000 per month on the selected date. The net asset value (NAV) will change each month as per the existing market conditions and the fund’s performance. 

You will get more units when the NAV is lower and fewer when the NAV is up through regular investment in SIP. For example, you can purchase a SIP of, let’s say, Rs 10,000 when the NAV is Rs 275.75 per unit, 36.25 units (Rs 10,000 / Rs 275.75). And if the NAV increases to Rs 470.75 next month, then you would get 21.24 units but if the NAV decreases to Rs. 246.13, you would get 40.63 units.

You can select flexible SIP. It allows you to change the instalment, depending on the current market conditions. You are under no compulsion to continue SIP investment for a long period of time, they can discontinue the plan any time. 

You can use investment calculator i.e. SIP calculator to find out how small investments done at regular intervals get you much better returns over a long span. Investment calculator is very easy to use. Enter the investment amount per month or quarter, investment tenure, and expected rate of return to find out the return on maturity.  

Lump-sum or (One Time) Investment

Lum-sum investment is the process of investing the entire amount in a selected mutual fund at once. Generally, financial experts who have the better understanding of the market and keep an eye on the prevailing market trends prefer to contribute to lump-sum investment. Individuals who seek advice from experts who understand equity market behaviour.

Lump-sum investments is a better option when:

• Valuation of the shares and markets is declining.

• When markets Price to Earnings (P/Es) ratio and specific stock Price to Earnings (P/Es) ratio are low.

• Also, at a time when the market corrects sharply i.e. when stocks, index prices decline sharply or when the trend of the market is in a panic situation. 

Usually, investors panic when the market is trending downward or is edging lower and may withdraw the investment or discontinue investing in equity mutual funds. But it is no use to panic or withdraw the investment. Well-informed investors or individuals who seek advice from an expert financial advisor will possibly invest more money in mutual funds during this period to get the benefits of overall high-weighted average returns during a longer period of time. For individuals who have a good knowledge of the equity market and are ready to take the risks associated with market volatility, lump-sum investment in the equity market is a perfect option for them.

To estimate the maturity value of the present lump-sum investment or one-time investment after maturity time is over, investors can use a lump sum calculator. Lumpsum calculator is very easy to use. Enter the investment amount, a number of years of investment, the expected rate of return into the calculator to know the maturity amount and how much benefits you get on the investment.  

Best Strategy 

It completely depends on your investment goals to select what type of investment you should choose. Decide whether your goal is a short-term, mid-term or long term, and how risk-tolerant you are. Hence it depends on your investment goals to decide what type of investment you should go for. It is a smart choice to opt for the blend of lump-sum and SIP. Taking everything into consideration, sound knowledge of the market and due diligence will help you get the best returns.

The right strategy to invest in a mutual fund is very simple. You should buy more units when the prices are lower to reduce the average cost per unit and sell when the prices are trending upwards, and also follow strict investment discipline. Don’t forget to use the investment calculators – lumpsum calculator and SIP calculator - no matter what investment option you choose.