Does It Make Sense To Take The SIP Route For Mutual Fund Investments?

The concept of SIPs (Systematic Investment Plan) has garnered a lot of popularity amongst investors. The idea of conveniently investing small amounts regularly rather than a relatively bigger one as lumpsum is something that appeals to a lot of investors, isn't it?

Last month, (December 2021), the mutual fund industryĄ¯s monthly SIP contributions peaked at an all-time high of ?11,305 crore. As per AMFI data, this is the highest ever amount of SIP contribution received in a month!

shutterstock

But is the hype around SIPs worth it? Does it make sense to invest in mutual funds through SIP mode instead of a lump sum? Read on as we unfold the same for you.

Also Read: 5 'Not So Known' Ways To Add The Glitter Of Gold To Your Portfolio in 2022

Comparing The Corpus: Lump Sum v/s SIP Investment Routes

First, letĄ¯s compare the corpus you accumulate on opting for SIP v/s the one through lumpsum mutual fund investments, especially because many investors are unaware that the maturity value varies for these routes.

Simply put, even if you invest the same amount for the same tenure, the accumulated corpus would be higher in the case of a lump sum vis-a-vis SIPs! Or, if you wish to accumulate a target corpus associated with a specific investment horizon, such as a corpus of 20 lakh for home loan down payment in five years, the amount of investment required would be lower in case of a lump sum, than SIPs.

LetĄ¯s take an example.

shutterstock

Suppose you wish to accumulate a ?1 crore corpus in the next 10 years.

Assuming a conservative rate of return as 15% p.a. in equity mutual funds for the investment horizon of 10 years, a SIP of close to ? 36,334 per month would suffice to achieve this goal. So, through a total investment of ?43.6 lakh in 10 years, you would be able to timely accumulate the target corpus of ?1 crore.

Whereas if you invest the same ?43.6 lakh lump sum for the same period of 10 years, assuming a similar rate of return as 15% p.a., you would be able to accumulate a much higher corpus of ? 1.76 crore.

And if you want to know the lumpsum investment amount required to exactly achieve the ?1 crore target corpus in 10 years, the required contribution turns out to be ?24,72,000, which is much lower than the total SIP investment of ?43.6 lakh to achieve the same.

Now, while the calculation shows that you get more value for money through a lump sum rather than SIPs, SIPs as an investment mode have their own set of benefits for which they are popularly being adopted by lots of investors.

Also Read: Does It Make Sense To Invest Your Surplus Or Prepay Existing Home Loan With It

Benefits Of SIPs

shutterstock

1. Low Minimum Investment Amount

Most mutual fund houses have a minimum SIP amount of ?500, but some have been offering an even lower investment option starting at just ?100 in recent times. For a lump sum, while some mutual fund houses have a minimum threshold for the initial lump sum investment amount such as ?2,000-?5,000, the same is usually not applicable on further investments post the first one. So, it's best to check with your chosen fund house regarding the minimum amount for both SIP and lump sum, if any.

Also Read: A MillennialĄ¯s Guide To (Crypto)Currency

2. Instills Financial Discipline Through Regular Investment

When you have to regularly invest a fixed amount on a fixed date and at a fixed frequency, like ?5,000 SIP every month or ?10,000 per quarter, you are likely to instill financial discipline, v/s when you don't have to do that. The auto debit feature of SIPs is exactly aimed at that, i.e to develop the habit of regular investing!

Also Read: Does It Make Sense To Cash Your Investments When The Market Crashes?

3. Negates The Need To Time The Market

shutterstock

The presence of rupee cost averaging concept makes SIPs a suitable investment route for those who wish to stay away from the stress of timing the market or in fact do not possess the adequate knowledge to do it.

Basically, 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.

So, when you continue your SIPs 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 rupee cost averaging, which eventually results in investors automatically ending up purchasing more units when the markets are low, which translates into lower average purchase cost due to lower average NAVs.

Also Read: Things To Know Before Investing In Equities Now That Markets Are Soaring

4. Flexibility To Change Amount & Date Of SIP

shutterstock

Although mutual fund houses generally do not allow modifications, especially reductions in existing SIP amount, 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. But the best way to know whether you can modify your SIPs is by contacting your mutual fund house.

And for changing the auto-debit date, most fund houses do allow modifications in the date of SIP. All you need to do is submit a common transaction slip which every asset management company (AMC) has. Meanwhile, you may consider pausing your existing SIP until the date gets changed, for your convenience, if needed.

Also Read: F(N)AQ: How To Bulletproof Your Investment Portfolio From Market Ups And Downs

Does It Make Sense To Go The SIP Way?

shutterstock

Now, after weighing the pros and cons, if you are wondering which investment route to choose, SIP or lumpsum, click here as we answer some of the not so frequently asked questions surrounding the same!

If we judge solely in terms of returns through the accumulated corpus, lumpsum investment clearly outscores SIPs, as you get higher corpus accumulated through the former, and the difference is significant!

But choosing lump sum investing isn't everyone's cup of tea, after all, it requires not only a relatively bigger investment amount but even requires the effort of market timing. It's best to take investment advisors and experts assistance in it if you lack the knowledge.

As far as SIPs are concerned, we have already listed the main benefits they offer. If you wish to simply invest a certain amount regularly towards a corpus, without stressing about the market timing, SIPs can be your answer. But remember that the corpus you accumulate is likely to turn out to be lesser than the one otherwise accumulated through lumpsum.

Also Read: From LIC & Oyo To Byju's: Top IPOs You Should Look Forward To In 2022

For more of such interesting financial content and the latest news, click here.

Click here to download CRED.