To make the most of your investment, you need to know when and how much to invest. However, another important thing to consider is ‘how to invest’.

There are two primary modes of investment: Lumpsum investments and investing through a Systematic Investment Plan. Systematic investing is more popular than lump sum investments, which is increasingly seen as an outdated way to invest money.

But before we get into which one is better, we need to understand what these are.

SIP Investment

An SIP or systematic investment plan is a way of investing in which an investor invests a fixed amount of money at regular intervals, usually monthly or quarterly.

With an SIP, the investor knows exactly how much he will invest and when. The investments are made based on a pre-determined risk profile, so the money is always invested in a way that considers the risks associated with each investment.

Lumpsum investment

A lump sum investment is simply an all-inclusive purchase of shares, bonds or mutual funds without any regularity or planning. The advantage of this approach is that it offers investors greater flexibility – they can buy and sell shares at any time, making it easier to take advantage of opportunities as they arise.

SIP and lump sum investment: Pros and Cons

There are a few pros and cons to choosing either a SIP or lump sum investment approach. Here are the main ones.

Pros of Investing through a systematic investment plan

1. Disciplined investing: You will get into a habit of investing regularly, which is very important for building wealth.
2. Peace of mind: You can be sure that your money is being invested in a way that matches your risk appetite with the risks associated with each investment.
3. More opportunities for growth: With an SIP, you have more opportunities to grow your money over time as the investments are made based on a pre-determined risk profile.
4. Averaging of cost: Since you will be investing in installments over a period, some of the investments will be made at a lower price and sometimes at a higher price, depending on the market conditions.
5. Provides predictability: Having an SIP allows you to know exactly when your next investment will be made and ensures that your money is always working in tandem with market trends.
6. Allows for more comprehensive coverage: With an SIP, you can invest in a wider range of stocks, bonds, and mutual funds than if you were investing lump sum. This gives you improved diversification benefits over time.

Cons of a Systematic Investment Plan

1. Needs effort to set up: While it’s possible to set up and maintain a SIP yourself, doing so can take some effort. This is especially true if you have limited financial resources.
2. Takes more time: It can take longer to build a SIP than it would to invest all your money in one lump sum. This is because the investments happen in installments over a period of time.
3. Greater risk: Because your money is invested over a certain period of time, there is always a chance that it will not achieve the same return as if you had simply put all of your money into one investment at once. This means that you could end up losing more than if you had opted for traditional investing methods.
4. Less flexibility: SIPs are designed to provide a set amount of money that is invested in a particular way, making it difficult to change your investment strategy or exit the market at any time.
5. Can be more expensive: Unless you are using an index Fund, which generally costs less than traditional mutual funds, investing through a SIP may lead to higher fees than if you had invested directly in stocks and bonds.

Advantage of Lump Sum Investment

Lump sum investments offer a higher potential return than SIPs, as they tend to be more volatile. This means that, over time, they could provide a greater return than regular saving or investment products. Ultimately, it is important to consider what is best for each individual investor.

Disadvantage of Lump Sum Investment

Lump sum investments offer a higher potential return than SIPs and are more volatile, but they also carry more risk. It’s important to carefully consider all the pros and cons of each type of investment before deciding.

Should you choose lump sum investments or SIP?

There is no one single answer to this question that will suite everyone.

Lump sum investment tends to be beneficial when a share’s price of the Net Asset Value (NAV) of a fund is less. As the price is low, an investor can buy more shares / units. On the other hand, a higher share price or NAV reduces the number of units the investor can buy, so he will have to wait for the prices to come down.

On the other hand, since SIP involves buying the shares / units on different dates, the purchase will happen in small quantities at different price points. Hence the average cost of investment will be lower.

In general, if you are looking for a high potential return over time and do not mind taking on more risk, lump sum investments may be right for you. However, if you value stability and predictability in your investment returns, SIPs may be a better option.

Ultimately, the best way to save for your future depends on what you’re looking for: a higher potential return or lower risk? If you want the highest possible return, then investing through a lump sum may be the better option. However, if you’re more interested in minimizing your risk while achieving a high return over time, SIPs investments could be a better option for you.

Happy Investing!

This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.