Frequently (Not) Asked Questions - Is Investing Lumpsum Better Than Doing A SIP In Mutual Fund?

Are you eager to step into the world of mutual funds to unlock their benefits but remain puzzled whether to opt for the lump sum route or SIPs to begin? We¡¯ve got that covered for you through these NOT so frequently asked questions regarding lump sum vs SIP investment.

What is SIP?

Systematic Investment Plan (SIP), as the name suggests, is a mode/route of doing staggered investment in mutual funds at a predetermined date (suppose 1st, 5th or 10th of every month), predetermined amount as well as frequency (monthly, quarterly, bi-monthly,bi-annually, etc.), as mutually finalised between the investor and fund house.

How does SIP work?

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With every regular and disciplined SIP investment, new units of that mutual fund are purchased at the prevailing NAV. Over time, the cost of purchase of these fund units averages out and turns out to be on the lower side vis-a-vis those of lumpsum investment. Simply put, when you continue your SIP when the market is down, you get to purchase more fund units as the NAV will be low. Similarly, when the market is booming, a lesser number of units are allotted. This mechanism is called rupee cost averaging, which eventually ends up in you purchasing more units at a lower average purchase cost.

What is Lump sum investment in mutual funds and how does it work?

Lump sum investment is when you invest a particular amount in one go, which is usually a big ticket or substantial disposable amount you have in hand. This way, you purchase the mutual fund units in lump sum as per the prevailing NAV. It¡¯s however, entirely your choice regarding how much you wish to invest in lumpsum and when you want to do so.

Does the maturity value of the invested amount vary when investing through lump sum vs SIP route?

Yes. The accumulated corpus for the same investment amount and tenure would be higher in case of lump sum vis-a-vis SIPs.

For example, lets say you want to become a crorepati in 15 years.

Assuming a conservative rate of return as 15% p.a. in equity mutual funds for a period of 15 years, an SIP of Rs 15,000 per month would be suffice to achieve this goal. So, through a total investment of Rs 27 lakh in 15 years, you would be accumulating around Rs 1.01 crore.

Whereas if you invest this Rs 27 lakh lump sum for 15 years, assuming a similar rate of return as 15% p.a., you would be able to accumulate a much higher corpus of Rs. 2.19 crore.

How much money do I need to start an SIP vs the minimum investment for lump sum?

Most fund houses have a minimum SIP amount of Rs 500, with some even offering to invest with as low as just Rs 100 in recent times. For lump sum, while some mutual fund houses have a minimum threshold for the initial lumpsum investment amount, the same may not be applicable on further investments post the first one. It's best to check with your selected fund house regarding the minimum amount, if any.

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Why and how much should one invest in the lump sum route?

Lump sum investment route gives you the freedom to invest as per your financial position and market conditions, apart from giving you more control of how much and when to invest in mutual funds. Moreover, with the right market timing and investment, the benefit of power of compounding and hence the returns in the form of accumulated corpus, is higher in case of lumpsum vis-a-vis SIP investments.

The investment in lumpsum would ideally depend on the investible surplus you have, the target corpus, investment horizon, chosen fund categories and accordingly the expected returns.

Why should one go for SIPs?

Besides the benefit of instilling the ability to achieve your financial goals without straining your finances through availability of extremely low minimum SIP amounts, SIP route of mutual fund investment offers other vital benefits like rupee cost averaging, instilling disciplined and regular investing, and doing away with the need for market timing.

Is the SIP amount and date fixed? Can you change it?

Fund houses usually do not allow modifications, especially reductions in existing SIPs. The predetermined amount set at the time of starting the SIP is usually auto debited from your linked account at preset frequencies. However, those who opted for the step up/top up SIP facility would be able to periodically increase their SIP contributions. As far as reducing your SIP amount is concerned, usually the only way is to stop the existing SIP and start a new SIP altogether. Best way to know whether you can modify your SIPs is by contacting your mutual fund house.

For change in dates, most fund houses do allow modifications in the date of SIP. All you need to do is submit a common transaction slip which very asset management company (AMC) has. Meanwhile you may pause your SIPs until the date gets changed, for your convenience.

When should you stop an SIP?

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Ideally, SIPs should be stopped only in three circumstances. One, to change the fund house or scheme if it's repeatedly underperforming v/s its peers and benchmark index.Second, if the fund¡¯s investment style and objectives do not match your investment goals. Thirdly, if investing in equities via SIPs, its recommended to stop the SIP when nearing the goal/corpus. This would prevent the accumulated corpus from being exposed to short term volatility of equities. You can invest that corpus in fixed income instruments like FD or debt funds and withdraw when required.

Can you do both an SIP and lump sum investment?

Yes, you can segregate your investment routes with a mix of both. You can put in some lumpsum in mutual funds as per market movements and availability of an investible surplus, while at the same time also carry on with regular investments through SIPs.

SIP route vs lump sum, which one to choose?

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There is no one size fits all formula here. When deciding the investment route for mutual funds, key factors like financial stability, investment goals, investible surplus amount and the ability to do market timing need to be considered by the potential investor.

While SIPs are favourable for those aiming to invest small amounts regularly without getting into the fuss of market timing, lump sum investment route tends to edge past SIPs in accumulation of higher corpus vis-a-vis the same amount invested through SIP for the same tenure and at the same expected returns. Lump sum route but also lets you retain control of your finances without the need to regularly keep on investing. But remember that, to maximise the returns from the lump sum route, it¡¯s important to regularly track the markets, try predicting the market movements and accordingly time the investments.

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