We almost use SIP and mutual funds investment synonymously. But SIP is not the only method to invest in mutual funds. In this article, we will discuss the differences between SIP and lump sum investment and evaluate each.
What is Mutual Funds?
Mutual funds are a simple way to invest in the stock market. Fund managers create a pool of funds from different investors and invest the corpus to the common financial goals of its participants. Before investing, they research each stock, analyse company fundamentals, performance, stock price trends, and prospects. Based on research, they invest in the most suitable options. Investors, especially new investors, can invest easily through mutual funds. They don't need to worry about their money being invested in the market as it is backed by a team of analysts and fund managers. Professional fund management helps reducing market risk. Mutual funds reduce market risk through a diversified portfolio by investing the corpus into different asset classes and horizons. With reduced risk, the loss incurred on one asset class gets offset by the profit earned on another. Often investors don't have the expertise and means to create a highly diversified portfolio that optimises returns. Mutual funds offer instant diversification beyond the capacity of an average investor. Further, the fund managers constantly track the fund's performance and make the right investment decision according to market movement. Since mutual fund investment offers so many benefits, investors constantly search for the best way to put their money in mutual funds. Let's now see the difference between SIP and mutual funds to understand which is a better method. To begin with, SIP is not a separate product. It is one of the methods of investing in mutual funds. Read More About What is Mutual Fund?What Is SIP?
SIP or systematic investment plan is a way to invest in mutual funds. It is a process through which you invest a fixed amount regularly over a period of time. Contrary to stock investment, where you need to time the market. SIP makes it easier for investors by setting up an investment plan through all market conditions and helps them benefit from rupee cost averaging. SIP gives the flexibility to select any amount and frequencies to invest in the market. It makes you disciplined by letting you invest in instalments while keeping monthly income and expenses planned and in sync.What is Investing In Lump Sum?
The opposite of SIP investment is lump sum investment, where investors initially invest the entire corpus. SIP and lump sum are the two ways of investing in mutual funds. Investors with a significant amount of cash in hand looking to park their funds can invest in a lump sum. However, an investor with regular income can set up a SIP plan based on investment goals and horizon. SIP requires investors to make fixed monthly/quarterly instalments towards the investment scheme. In lump sum investment, all units get allotted at the beginning of the investment depending on NAV value. Hence, you need to time the market and invest when NAV is low to get the maximum units allotted. But with SIP, you can invest under any condition and get units accumulated per market value. Let's understand with an example. Suppose you invest Rs 24,000 in the market. While investing in a lump sum, you will get units worth Rs 24,000 allotted when making the payment. Now for a SIP, the same amount gets spread over a year while you make payments of Rs 2000 per month. Each month you receive Rs 2000 worth of units to your portfolio depending on current market NAV. As a result, SIP allows you to accumulate more units over a period.How Does SIP in mutual funds work?
- Understanding SIP: Let's break down the concept of a Systematic Investment Plan (SIP) in mutual funds.
- Regular Contributions: Choosing SIP is like committing to regularly invest a fixed amount.
- Transaction Process: The chosen amount is debited from your bank account, and fund houses process the transaction.
- Unit Allocation: You receive mutual fund units based on the current Net Asset Value (NAV) during each transaction.
- Accumulation Over Time: Subsequent SIP investments increase your unit holdings, accumulating over time.
- NAV Impact: Each SIP instalment results in unit allocation at the prevailing NAV on that specific day.
- Example Scenario: For instance, investing Rs. 10,000 monthly on the first business day in Nippon India Growth Fund, a mid-cap fund.
- Methodical Approach: SIP guarantees a systematic and disciplined investment strategy.
SIP And Mutual Funds: Differences At A Glance
Methods
Both are different methods of investing in mutual funds. SIP is a process of making fixed instalments to accumulate mutual fund units over the investment tenure. In lump sum payment, the units get allotted at the beginning of the investment period and remain unchanged.Power Of Compounding
In SIP, investors invest in a disciplined way to accumulate wealth. It is considered a better route to achieve financial goals. Mutual fund investors can reinvest their earnings which allow them to enjoy the power of compounding for the investment period. Reinvesting in the same plan helps accumulate more units and result in higher returns.Flexibility
SIP allows you more flexibility with small regular instalments spread over the investment period. Hence, SIP suits salaried investors better, as it will enable them to invest without curtailing their current lifestyle. Lump sum investment suits better when investors have a surplus fund which they need to invest in one go.SIP Benefits
- Affordability: SIP allows for a minimal investment starting at just Rs 100.
- Income Cycle Alignment: SIPs can be synchronized with monthly income cycles, making it convenient to allocate a portion of earnings towards investments.
- Automatic Feature: The automatic nature of SIPs addresses the problem of investing during market highs and withdrawing during lows.
- Adaptability: SIPs bring flexibility to the table, allowing you to gradually build your investments and harness the power of compounding.
- Smart Investing: With regular SIP contributions, the concept of rupee cost averaging helps balance out your overall investment cost. You accumulate more units during market downturns and fewer units when the market is up.
- Alleviates Concerns About Market Timing: Systematic Investment Plans (SIPs) eliminate the necessity to fret over the opportune moments for market entry or exit, offering a methodical and disciplined approach to investing.
- Accessible Start: SIPs enable individuals to start investing with a modest amount, promoting financial inclusion.
- Long-Term Wealth Creation: Overall, SIPs offer an accessible, synchronised, and strategic approach to building long-term wealth.
Benefit Of Cost Averaging
Investors enjoy the benefits of rupee cost averaging with SIP investment. Rupee cost averaging is an approach where you invest fixed payment toward a mutual funds scheme. It allows you to receive more units when the market is low and fewer units when the NAV value is high. This way, you get maximum value for your investment in a volatile market when it lowers the overall cost of investing. It dismisses the need of monitoring the fund's performance daily. Lump sum doesn't offer the benefit of rupee cost averaging, and the units get allotted at the beginning of the investment period.Hedge Against Volatility
SIP eliminates the necessity for timing the market. Investors, especially the new ones, are often uncertain about the right time to enter the market. However, with lump sum investment, there is always a need to find the right time to invest to receive the maximum number of units. On the other hand, SIP spreads investment over a period and reduces uncertainties arising from market volatility. It allows rupee cost averaging, an approach to receive more units while the market is low and less during an uptrend.Differences Between SIP and Lumpsum
| Parameters | SIP | Lump sum |
| Method | Regular payments over a period | One time investment |
| Flexibility | High. SIP lets you select the frequency of investment and investment amount | Low |
| Cost | The overall cost is less because of rupee cost averaging | The cost is usually high because of one-time investment |
| Volatility | Less affected by market volatility | Needs investors to time the market correctly as market trend affects the number of total units allotted |
The Top Performing SIP Mutual Funds
| Fund Name | Category |
| Kotak Standard Multicap Growth | Multi Cap Fund Growth |
| Motilal Oswal Long Term Equity Fund-Regular Plan-Growth | Tax Savings Scheme |
| Mirae Asset Large Cap Fund Regular Growth | Large Cap Fund Regular Growth |
| Axis Bluechip Fund Growth | Large Cap Fund Growth |
| Invesco India Growth Opportunities Fund-Growth | Diversified Fund |
| Mirae Asset Tax Saver Fund – Regular Plan-Growth | Tax Savings Scheme |
Concluding Thoughts
SIP and mutual funds investment are simply the two ways of investing, each with a set of pros and cons. We hope that by the points discussed above, you now have a clear understanding of when SIP is better over lump sum investment and vice versa. However, in the end, SIP has some clear advantages over lump sum investment and lets investors start investing in any market condition. Whether you select to invest through SIP or mutual funds, always choose a method according to your convenience, income, and investment goals. Related Mutual Fund ArticlesFAQs
What is an SIP?
SIP stands for Systematic Investment Plan. It is an investment method that allows individuals to invest a fixed amount of money at regular intervals, typically monthly or quarterly, in a mutual fund or other investment instruments. SIPs are designed to encourage disciplined investing and provide the benefit of rupee cost averaging.
What is a mutual fund?
Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, money market instruments, and other assets. These funds are managed by professional fund managers who make investment decisions on behalf of the investors.
What is mutual funds vs SIP key difference?
The main mutual funds and SIP difference lies in their nature and purpose. SIP is a method of investing in mutual funds, while mutual funds are the investment vehicles themselves.
How are returns estimated in SIP and mutual funds?
The returns in SIP depend on the performance of the underlying mutual fund in which the investments are made. Mutual fund returns are directly linked to the performance of the portfolio and may vary based on market conditions and the fund manager’s expertise.
Can you withdraw your SIP investment anytime?
Yes, you can but there might be some limitations to it. While a SIP enables investors to contribute small amounts at regular intervals and generate substantial returns over time, there may be instances where early withdrawals become necessary due to unforeseen circumstances and so it can be done.
