Difference Between SIP and Lump Sum

Manish Kothari
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isVerifiedExpertAuthor is a Zfunds Verified Expert
Manish Kothari

SIP vs Lump Sum 

While investing in mutual funds, one can either choose to make investments through the SIP (Systematic Investment Plan) route or a single-shot lumpsum investment. Both the ways of investing have their own benefits and one may make this decision based on his risk appetite, investment amount, market cycles & other important parameters. 

Let’s have a look at the features of both the ways of investing.

Lump-Sum Investment

Lumpsum investment is simply a single-payment investment. Here, the investors make an investment into the chosen mutual funds at one go. This way of investing is suitable for investors having a substantial amount of money which they can park in one shot through a one-time investment. 

A lump sum investment is considered to be a smart option when the valuations are low in the markets. Valuations can be tracked through various valuation ratios like Price to Earnings (P/E) and Price to Book (P/B).

Features of Lump Sum Investment

  1. Control over investments

If you invest a lump sum, you will be able to determine how much to invest, and in which mutual funds as per the market conditions. Without relying on the judgment of  fund managers, you can make decisions to switch b/w different funds as per your analysis of the market conditions & the performance of funds. 

2. Power of Compounding

You can appreciate the power of compounding when you invest a large lump sum and stay invested for a long time. Your capital earns revenue via appreciation or interest. This income continues to earn extra returns when reinvested. As a result, you will be able to accumulate a huge corpus in the long term. 

3. Let’s you benefit from market corrections

An investor with a good knowledge of financial markets can use the strategy of buying at dips or during market corrections by making lump-sum investments and later on, can benefit from the rise in markets.

4. Convenience

This way of investing let’s you invest as per your convenience by making investments only when you are willing to invest unlike SIPs, where you need to follow a disciplinary approach. 

Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) is a disciplinary investment approach in which the investor has to invest a fixed sum of money regularly after a predefined period of time i.e daily, weekly, monthly, quarterly, etc. This approach helps to reduce the average costs per investment unit through the concept of Rupee Cost Averaging. 

Features of SIP

There are many features of SIP which are mentioned below:

  1. Financial Discipline

Over time, investors often fail to maintain the habits of regular savings & investments. The secret to any investment is following a committed & consistent approach of making investments. A systematic investment plan, as the name implies, is a system of periodically investing a specific sum of money on a predetermined date. This way, it brings discipline to your investment habits.

2. Power of Compounding

The compounding effect amplifies the benefits of SIP since returns get compounded and hence, it helps investors to earn good wealth over a long period of time.

3. Small and periodic investment

Systematic Investment Plan helps you reach your financial goals even with a small sum of investments made over periodic intervals. The SIPs become much lighter for your wallet. This helps you to make investments as per your needs & requirements, even for low as Rs. 100/- per installment. For beginners, SIPs are a very good way to inculcate the habits of savings & investments for long term goals.

4. Rupee Cost Averaging

Rupee cost averaging is an automatic market timing method. So because investments in SIP are made at periodic intervals, more units are purchased in the declining market, and thus, as the markets shift upward, the value of the investments is synchronized. The divergence in returns between SIP and lump sum increases as the SIP thrives on volatility.

Comparison between Lump Sum and SIP Investments

  1. Power of compounding

Your investment in a SIP could be as small as Rs.100 INR per month. It means that you can save money consistently in the long term. Since the monthly investments are low, the actual returns may not be very high. On the other hand, when you invest a big sum of money and stay invested for the long term, you will be able to realize the benefits of compounding better. As with large investments, the expectations of returns is also high.

2. Cost of Investment

Cost of investment is considered to be lower when it comes to SIP due to rupee cost averaging which enables investors to lower down the average cost of investment and cut down the risks linked with the market volatility by sharing the price of purchase over the course of time. This concept is also known as rupee cost averaging. 

Since the investments are one-time in lumpsum, costs per unit might come out higher in bull markets as compared to the ongoing SIPs in same schemes over time.

3. Past Performance

When looking at the past performances of investments made through SIPs and Lump Sum, it is noticed that SIP investments have earned higher returns with more consistency as compared to the lumpsum investments, however not for all the instances.

4. Amount of Investment

You can start investing in SIPs with as low as Rs. 100 a month. However, the minimum SIP amount differs across schemes.

On the other hand, generally, lump-sum investments have higher minimum requirements for the investment amount. The minimum amount varies across different MF schemes.

5. Suitability

SIP is advisable for investors having low to moderate risk appetite.It is suitable for investors who want to follow a disciplined investment approach to reach their financial goals or accumulate wealth over a long period of time with relatively lower volatilities in returns. 

Lump Sum investments are recommended to investors having high to moderate risk tolerance. Also, it is suitable for investors who have some extra cash which they are looking to invest.

ParametersSIPLump Sum Investments
FrequencyInvestments over regular intervals. One-time, single payment.
Volatility LowHigh
Cost of InvestmentLower, due to rupee cost averagingHigher
Investment sizeLowHigher
Risk Appetite Low to moderateModerate to high
Investment HorizonIdeal for short as well as long term.Ideal for long term or as per market outlook.


Lump Sum or SIP, Which is better?

Lump-Sum investments as well as SIP investments, both have their own characteristics and are suitable for investors as per their risk appetite, requirements & financial goals. SIP is one of the best ways to build a good corpus over the long term. Also, it helps the investors to enter into financial markets with minimum investment requirements & higher flexibility.

On the other side, Lumpsum investments provide the opportunity to earn sizable capital gains through large investments as per the market outlook & conditions.Moreover, it lets you put your idle money in the markets to earn good returns as per your requirements & preferences. 

So,the best way would vary among investors as per their needs & requirements.


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