Systematic Investment Plan (SIP) or lump sum is one question that baffles nearly everyone during an investment process. Situations may arise where you have more in hand to invest, but the logical SIP route holds you back from taking any decision. Protection against ill-market timing, power of compounding and other associated benefits with SIP take over the urge of lump sum investment.
However, one cannot overlook the fact that few investors aren’t as comfortable with SIP as others. Letting the amount sit ideal in a bank account and transferring it systematically into an equity fund through SIP route might involve more time than investing at one go. At the same time, investing lump sum into a liquid fund and switching it into an equity fund does not free up time either.
Thus, in order to get a better perspective, it's important to review the conditions when lump sum investment can score over SIP.
1) When it’s for a real long time - SIP generates incredible results over long-term and that does not change a bit for lump sum investments as well. In fact, power of compounding can yield far heftier returns in lump sum than SIP. Let’s take a look at these two scenarios, where a similar investment is broken down into equal monthly investments and lump sum.
SIP
|
Investment Amount = Rs 5,000 Investment Tenure 20 Years Rate of Return = 12% |
₹ 49,46,276.83
|
Lump Sum
|
Investment Amount = Rs 12,00,000 Investment Tenure 20 Years Rate of Return = 12% |
₹ 1,15,75,551.71
|
* Rate of return is assumed based on average historical return by mutual funds.
2) Income flows are erratic - Investors belonging to business or professional background might not receive regular incomes and so SIP might not work for them just as well as they do for salaried individuals. The irregular flows at different timings makes lump sum route as logical option for people with variable incomes. Such individuals can choose to manually invest at one go as and when they have a sizeable corpus in hand rather than committing to SIPs on fixed dates.
3) Effective for calm and experienced investors - Lump sum investments are not as insulated as SIPs against market volatility. Hence, this route is more appropriate for investors, who do not lose their calm during wide market fluctuations. Also, the method suits investors who are more into active investing and know how to manage their portfolios in response to market momentum.
4) Goal investing does not go anywhere - Lump sum investment requires equal or in fact higher need of goal planning. It is important that an investor does not lose sight of goal, the absence of which, will make lump sum investing pointless.
5) Active review - Lump sum investment should follow active review and readjustment. If an assigned goal needs more cash infusion than the same needs to be arranged to make good of any shortfall. Similarly, better-than-expected surpluses should also be managed smartly so that the gains earned are not lost to market volatility.
After having reviewed the above conditions, it can be deduced that lump sum investment investments aren’t as bad as perceived. Investing at one go can be equally rewarding as SIPs when executed properly.
About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.
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