Equity mutual funds: SIP or lumpsum, which option is the best for you?

    As a retail investor, you have two ways in which you can invest in equity mutual funds. The first is a one-time lumpsum investment and the second is the Systematic Investment Plan (SIP) route through which you make small but regular contributions to the fund spread over a period. To understand the difference between both these investment modes and which one is better suited for you, read on.

    • Investment frequency

    Both the lump sum route and SIP mutual fund endow you with the benefit of wealth appreciation. However, the basic difference between both modes is the frequency. An SIP allows you to invest in different types of mutual funds periodically like quarterly, half-yearly, monthly, etc. In contrast, lumpsum permits you to make bulk investments one time in a particular mutual fund scheme.

    • Minimum investment amount

    The next point of distinction between both routes is the provision for a minimum investment amount. You can invest in SIP with a monthly investment of only Rs 500. However, in the case of lumpsum investment, you must invest at least Rs 5,000 initially in a mutual fund and may top up the same scheme with a minimum investment of Rs 1,000.

    Thus, if you have small but regular investible funds, then an SIP is the go-to option for you. However, in case you have a high investible amount, then the lumpsum route may be a more advantageous option for you.

    • Market monitoring

    As lump sum investments require a bulk commitment, you must know when to enter the market. This route can prove to be beneficial if you invest during the bearish markets when prices are low. However, in the scenario of SIP mutual funds, as the investments take place periodically, you get the opportunity to witness different market cycles, which eliminates the need for keeping a close watch on the market.

    • Averaging of cost

    When you invest in SIP mutual funds, you buy mutual fund units during different market cycles so the cost per unit is averaged over the investment horizon. A higher number of units are purchased during bearish markets, which compensates for the purchases during bullish markets. Such purchases help to tide over market fluctuations as well as balance out the buying cost. Bought units may be redeemed when markets perform well. In the case of the lump sum route, you cannot get the benefit of cost averaging.

    Which is a better investment – lumpsum or SIP?

    Whether to opt for a lump sum or an SIP is one of the age-old dilemmas. It is difficult to make a choice. As per advisors, both investment options have their own set of advantages. As stated above, investment frequency is one of the major points of distinction between the two routes. You can invest only once in the lump sum route while in SIP mode, you must invest periodically.

    An SIP is often advised as this route inculcates financial discipline, provides rupee cost benefits, permits flexibility in investment, and permits you to make the most out of the compounding effect. However, note that the lumpsum route is one of the best options during bearish markets as it permits you to purchase a higher number of mutual fund units at a lower net asset value.