Should You Invest a lump sum amount in a mutual fund or SIP?
Lump Sum investing is where you invest all the money in one go. Under the SIP mode of investment, you decide on an amount that will get invested periodically.
Sip Vs Lump Sum: Which Is A Better Mode Of Investing?
Both investment routes perform differently in different phases of the market. There is a possibility that the market may correct immediately after you invest your lump sum amount. In this scenario, your average buy price of a unit of the index fund would have been lower under the SIP route. To put it in a simpler way, had you invested via SIP in a falling market scenario, you would have been able to buy more units of the mutual fund for the same price.
On the flip side, if a market is constantly rising, like the way we saw after the COVID-19 crash, the lump sum investments would have performed better than the investments made through the SIP route.
However, to evaluate them over the long term, we did a simple exercise.
We looked at NIFTY 50 returns for two scenarios:
1. Returns if you invested a lumpsum amount at the beginning of a period.
2. Returns on a monthly SIP during the same period.
What did we find? A mixed result.
Of the 14 different periods we checked, SIP did better seven times. Lumpsum offered a better rate of return on seven occasions. Check the table below to see the findings
What is the takeaway from this exercise?
SIP and lumpsum are merely methods of investing. One doesn’t guarantee better results than the other. In fact, if you have the money, it’s better to go for the lumpsum route. Why? Because you can create a bigger corpus.
Let’s continue with the same example.
But this time, we won’t just check the rate of return. We’ll check the final value of the investment. Check the table to see how much extra corpus you can create if you invest in lumpsum as against SIPs.
In the above example, the monthly SIP amount is Rs. 5,000 in NIFTY 50 -TRI. In all scenarios, the end corpus is higher in the lumpsum method. And this was for obvious reasons.
Why’s that, you ask?
The reason is a no-brainer. In the lumpsum route, a bigger corpus is getting more time to compound. Some investors are of the view that if you have a large corpus, you should split it into six equal monthly instalments.
However, this is not a foolproof method.
If the markets rally during those six months, your average cost might increase rather than average down.
Which Is Better?
If you have the money, don’t shy away from lumpsum investments on different dates which is also a good strategy.
Your money is better off in Mutual Funds than in your bank account.
And if you have a regular income and want to gradually create a bigger corpus, there’s no better way than SIP.
However you can invest in Lumpsup in between alongwith SIP whenever you have some spare money to invest which will help to build big corpus earlier.
Hope this helps!
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*Mutual funds are subject to market risks. Pl read scheme carefully
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