Lumpsum Vs SIP – which is a better way to invest

If you have finally decided to invest and ready to get on with your investing. First thing you do is to sit with your financial advisor and select an appropriate fund/plan. There are a range of funds to choose from. Most funds now, provide two options to get into.

The two options are :

1.       Lump Sum

2.       SIP (Systematic Investment Plan)

In the Lump Sum way of investing, you put a certain amount of money for a period.  The money is invested in for a duration. This way of investing is done by people who have received a lump sum of money through any ways viz., redemption of a prior FD/investment, received a bonus, selling of property , or other ways. Since the money is parked for a longer duration, it goes through the effects of compounding. The advantage of this route is the compounded returns on the whole sum obtained at the end of the tenure. So whenever you have a large amount of money, this is the obvious choice

The second way of putting your money is choosing the SIP way, whereby you allocate a certain amount of money every month/ year, to be put in your funds. Whether you choose to invest monthly or yearly is purely your decision based on two important considerations, first is the amount of your money at your disposal and, second is your short and long term objectives. SIP way is an ideal way to invest for most salaried people, as it can be easily planned with their monthly budgets. This approach to invest money is recommended for people, who have a regular and stable source of income. Investing in SIP also helps in developing a habit of investing and, a discipline to manage finances. There are few variations of SIP investing which have come up recently, but let’s keep them aside at the moment.

Now since we are aware of two different ways of investing and their advantages, we might be curious to know which one is better. There is no right or wrong answer to this. Most people can use both the ways of investing, depending on their cash flows. They can invest lump sum, whenever they get money in bulk and can keep using SIP way for investing on a regular basis. If we look at the returns generated over long terms from equity and MFs, there isn’t any major difference between the two ways. The way to create a huge return is to invest regularly over a longer tenure.