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Investing Strategies

Investing Strategies: Lump sum vs. SIP – Which is Right for You?

Introduction

The jungle king has one big meal and is done for a couple of days. A bird, on the other hand, has frequent small meals throughout the day. In mutual funds, a lump sum investment is akin to one big meal of a lion, while a Systematic Investment Plan (SIP) is like a bird’s small, frequent, regular meal. A lion knows that he needs a heavy meal to carry his massive weight and power to hunt, and the bird knows that a small stomach can digest food only in small quantities, and they eat accordingly. However, it is not easy for humans to choose between SIP and lump sum when it comes to investing. This dilemma often crops up when we, unlike the animals, are unaware of our financial needs. Let us clarify this issue and try to answer the question.

“Should I opt for a systematic investment plan (sip) in a mutual fund, or a one-time lump sum investment?”

Understanding Systematic Investment Plans (SIPs)

A Systematic Investment Plan (SIP) is a disciplined approach to investing in mutual funds. It involves investing a fixed amount at regular intervals, typically monthly or quarterly.

Suppose you invest ₹10,000 monthly in an equity mutual fund through an SIP. Over ten years, your total investment would amount to ₹12 lakh (₹10,000 x 12 months x 10 years). If the fund generates an average annual return of 12%, your total investment could grow to ₹23 lakh, thanks to the compounding effect and rupee-cost averaging.

To know more about our SIP, click here

Systematic investment plan benefits
  • Rupee Cost Averaging:SIPs help mitigate market volatility by investing fixed amounts regularly, buying more units when markets are down, and fewer when up.
  • Disciplined Approach:Automating investments fosters disciplined saving, and curbs impulsive decisions.
  • Flexible and Affordable:SIPs allow starting with as little as ₹500, and thus catering to varying income levels.
  • Compounding Benefits:Consistent SIP investments leverage compounding and thus have the potential for steady growth over a long period.
Understanding Lump Sum Investments

A lump sum investment involves investing a significant amount of money in a single transaction. Investors often prefer this approach when they have a windfall—an inheritance, bonus, accumulated savings, etc.

Suppose you have ₹5 lakh to invest in an equity mutual fund as a lump sum. If the fund generates an average annual return of 12%, your initial investment could grow to ~₹16 lakh over ten years.

Advantages of Lump sum investments

  • Potential for High-Returns:Lump sum investments offers the potential for greater returns in bullish markets if investments were made when the market levels were low. Additionally, the absolute, gains on large amounts are high.
  • Ideal for Windfalls:Lump sum investments are suitable for efficiently deploying substantial funds from bonuses, inheritances, asset sales, etc.
Difference Between SIP and Lump Sum Investment

Here is a list of key differences between SIP and Lump sum:

Criteria
SIP
Lump Sum
Investment Amount Small, fixed, regular amount Larger one-time investment
Market Timing Not needed as regular investments average out fluctuations over time Expertise is required to choose the right time to invest.
Rupee-Cost Averaging More units are allocated when the market is low Rupee cost averaging is not at play here since this is a single investment. There is a possibility of making a  purchase at high prices.
Flexibility An investor can increase, decrease, or skip SIP as to financial health Every new purchase requires a fresh instruction.
Time Horizon Suitable for long-term goals, leveraging compounding power Ideal for both short-term and long term goals,
Risk Tolerance Ideal for most investor types, including risk-averse investors, as the volatility impact is reduced over time Suited for investors who have a higher risk tolerance,
Conclusion

The choice between SIPs and lump sum investments ultimately depends on your financial goals, risk tolerance, investment horizon, asset class and personal preferences. While SIPs offer the advantage of rupee-cost averaging and disciplined investing, lump sum investments can capitalise on market opportunities and potentially generate higher returns in specific market scenarios. Investors can also consider a hybrid approach, combining the benefits of both strategies.

Selecting the best SIP and lump sum plan can be daunting for investors. However, Standard Chartered Bank makes it super easy for you. You can choose from many Standard Chartered SIP plans or lump sum options based on your financial objective and risk appetite.

Find out wealth that you can accumulate over the years with our SIP Wealth calculator