It has been more than one and a half decade since the concept of Systematic Investment Plans (SIPs) was introduced in India. Even now people face various difficulties in deciding on their investments. And the biggest question that arises is the comparison between the lump sum investments and the SIPs.
A plethora of questions come up in the minds of the investors before they invest their money in any of the schemes. Which of the two approaches out of the lump sum investment and SIP is better? Which of the two will give you higher returns? How can the two approaches to investment be compared? Many such questions are genuine for the investors.
Through this article, we will try to compare the two approaches and give logical explanations to prove which one is better.
The basic difference between a SIP and lump sum investment is that SIP is a recurring investment and lump sum investment is a one-time investment. Generally, people who have earned a large amount of money maybe through the sale of some property, or money received from the retirement, etc. think of investing this money in a lump sum investment scheme. Lump sum investments are recommended when you have a detailed knowledge of the market. Else it is suggested to adopt the route of SIPs which is considered safe and more profitable.
Let us look at some of the benefits of the SIP schemes over the lump sum investment schemes:
- SIP is rupee cost averaging : You must have heard of the concept of rupee cost averaging. It is nothing but SIP. The general tendency of the investors is to invest more money when the markets are going up and to lower down or withdraw their investments when it goes slack. SIP saves you from this pattern of investment. It is spread over a period and thus always gives you an average return on your investments which can be calculated using SIP calculator. It also eliminates the mental stress of deciding when to invest and when not to.
- No worries of the fall in the market : Suppose if you invest a huge amount of money kept with you all at one time in a lump sum investment scheme and the market crashes due to some reasons. In this case, you’ll be at the risk of a higher amount of loss and you will lose a big amount of your investment. If you invest the same money in SIP scheme, you will have to pay in installments and your investment will be spread over a period of time. Therefore, at a given time only a limited portion of the money invested by you will fall prey to the fall or crash in the markets. Thus, by limiting your losses you can maximize your returns through SIP.
- You develop a habit of regular investment : SIPs can give a higher return when you invest in them for long-term and do it regularly. You get into the habit of investing every month regardless of the circumstances. This healthy habit will always earn positive dividends for you.
You can also use the online tools such as the lump sum calculator and the SIP calculator provided by the websites like moneycontrol.com, upwardly.com, etc. to get an idea about the returns and the installments.
Getting higher returns from the SIPs is not a matter of probability or magic. It works on the basis of absolute laws of the market and economics.
Hope this post helps you decide which one is better – lump sum or SIP.