SIP vs. Lump Sum: Choosing the Right Investment Method

In this article, we will discuss

• What is SIP?
• What is Lump Sum?
• Advantages of Investing via SIP
• Advantages of Lump Sum Investment
• Key Differences Between SIP and Lump Sum
• What Should You Consider Before Choosing SIP vs Lump Sum?
• About SIP Calculator
• Conclusion
• FAQs

When it comes to maximising gains from the stock market, there is no beating mutual funds. They facilitate portfolio diversification, exposure to several asset classes and industrial sectors and the benefit of professional management. However, have you thought of the better way to invest in these schemes? Well, there are essentially two ways to do so – SIP and lump sum. But which one should you choose? Find out the differences between them, along with the answer to this question, by reading this blog.

What is SIP?

A Systematic Investment Plan (SIP) is a phased investment method. It allows you to invest in a mutual fund scheme by investing a fixed amount of money, at regular intervals, over a time period of your choice. Given its sheer flexibility, SIPs are one of the most popular mutual funds investment methods. You can start with a SIP amount as low as ₹500 and scale up your investment with time. Now, most schemes allow you to make monthly contributions. However, there are also some which facilitate daily, weekly, quarterly and yearly instalments. Investing via SIPs also serves as a savings plan. It helps create a disciplined investment habit among individuals, enabling them to avail a substantial maturity corpus without putting a strain on their finances.

What is Lump Sum?

As the name suggests, this method allows you to invest a lump sum amount in a mutual fund scheme. This is an excellent tactic for investing money gained from matured FD schemes, policies, bonuses, inheritance and more. You can deposit the entire amount in one mutual fund or multiple schemes of your choice. As per latest news, the Securities and Exchange Board of India (SEBI) has made it mandatory for AMCs to offer mutual funds with a minimum lump sum amount of ₹100. However, this factor may differ across schemes. Additionally, there is no maximum investment threshold.

Advantages of Investing via SIP

Here are some of the advantages of investing in mutual funds via SIPs:

• Rupee Cost Averaging

One of the biggest advantages of SIPs is rupee cost averaging. It enables you to get more fund units when the prices of the assets in the portfolio are low or bearish. Your investments stay safe even during times of market volatility, enabling you to get stable returns in the long term. Moreover, this nullifies the need for timing the market before starting a mutual fund investment.

• Flexibility

Apart from choosing your regular investment amount, SIPs also allow you to pause, stop and change your monthly contributions as per your needs. Additionally, if required, you can redeem some of your units and still continue with the plan without affecting your investment goals.

• Portfolio Diversification

With SIPs, diversifying your portfolio is a walk in the park. You can divide the amount you wish to invest among different types of schemes like – equity, debt, hybrid funds, etc., and enjoy diversification across different sectors and asset classes.

• Compounded Returns

SIPs are also a great way to avail compounded returns. The interest that you earn gets added to the principal amount, and with a systematic approach of investment, you can gain lucrative compounded returns in the long run.  

• Suitable for New Investors

If you are new to investing in the stock market, opting for systematic investment plans is an effective way to test out the water before trying something else. Additionally, as most schemes are actively managed by fund managers, you have less chance of incurring losses due to market fluctuations.

Advantages of Lump Sum Investment

These are the benefits of making lump sum investments in mutual funds:

• Tax Benefits

Lump sum investments are a great choice if you are willing to avail tax benefits. You can deposit your corpus in an Equity Linked Saving Scheme (ELSS) and avail deductions of up to ₹1.5 lakh within a financial year under Section 80C of the Income Tax Act. However, remember that tax-saving schemes come with a 3-year lock-in period.

• Ideal for Self-Employed Individuals

Self-employed individuals like businessmen or people who offer their services to various clients do not have a regular monthly income. For them, the lump sum investment method can be the better choice. They can make a one-time deposit whenever they feel feasible and plan for the next one as per their investment objective.

• Useful in Case of Short-Term Debt Funds

If you are planning to invest in short-term debt funds, choosing a lump sum investment may be the better for you. The reason being such schemes have an investment horizon of 1 to 3 years. So, opting for SIPs, in this case, will not yield as great a return as its lump sum counterpart.

Key Differences Between SIP and Lump Sum

To choose between SIP and lump sum, you need to know their key points of difference. They are mentioned in the table below:

What Should You Consider Before Choosing SIP vs Lump Sum?

Here are some factors which you must keep in mind while choosing between SIP and lump sum:

• Risk Appetite

Whether you choose SIP or lump sum, both options come with a certain level of risk. In case of SIPs, you can pause your investment and continue with it when you feel that the market is in your favour. However, for a lump sum, once you deposit your money, there is no way to pause the investment other than redeeming it.   

• Market Conditions at the Time of Withdrawal

The returns that you get from both SIP and lump sum depend on the market conditions at the time of redemption. Due to rupee cost averaging benefits, SIPs can provide you stable returns even in unfavourable market conditions. However, in case the market is favourable, chances of profits are greater in case of lump sum investments.

• Investment Amount

Determining the investment before going for a systematic investment plan or a lump sum is essential. For SIPs, experts advise selecting an amount which you can pay at regular intervals without fail. Whereas, in case of a lump sum, it is suggestible to allocate a sum which you can afford to lose without straining your overall finances.

About SIP Calculator

When starting a SIP, calculating the monthly instalment amount to meet your expected maturity corpus can be hectic. Thus, to make things easier, consider using a SIP calculator. It is an online tool which can help you determine an estimated value of your total investment depending on your SIP amount. To use it, simply enter your monthly investment amount, tenure and expected return rate. The system will display your total investment amount, estimated returns and the estimated total value of your investment. Now, in case you want to invest via a lump sum amount, you simply need to use the lump sum calculator. Just enter your total investment amount, expected return rate and time period. The platform will display your estimated returns, along with your total investment value.

Conclusion

In a nutshell, SIPs are more suitable for new investors or individuals who do not have that much time to analyse market movements. Its aspect of rupee cost averaging can help you avail stable returns by reducing the effects of volatility. Alternatively, lump sum investment methods are apt for experienced investors who know the ways to time the market in order to book profits.

FAQ's

• What are the tax implications for mutual fund investments?

Ans. For equity funds, Short-Term Capital Gains (STCG) tax is applicable at 15% if you sell your holdings in less than 12 months. However, for periods longer than that, Long-Term Capital Gains (LTCG) at 10% is levied for profits above ₹1 lakh. Additionally, in case of debt funds, taxation is applicable as per the investor’s applicable income tax slab.

• Do I have to pay taxes for mutual funds every year?

Ans. No, tax on mutual funds is only applicable when you redeem or sell your units. However, if you get dividend income from your invested schemes, it is taxable as per your applicable slab every year.

• What is the tax rate for dividend income from mutual funds?

Ans. Dividend income from mutual funds is taxable as per your applicable income tax slab. Furthermore, if the amount crosses ₹5,000, a 10% tax deduction at source (TDS) is applicable.

• What is the good investment horizon for mutual funds?

Ans. Experts recommend staying invested in a mutual fund scheme for at least 3 to 5 years. For small-cap funds, the suggestable time period is 7 years. However, this factor should ultimately depend upon your investment objective and risk tolerance levels.

• Are ELSS funds taxable after the 3-year lock-in period?

Ans. After maturity, returns from ELSS funds are only taxable if they are above ₹1 lakh. Long-term capital gains tax is applicable at 10%, along with the applicable cess and surcharge.

Disclaimer:

INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847