Investing has become a necessity in today’s world but investing correctly is necessary. Every investor has a different style or approach methods for investing. Some investors choose to invest their all capital at once only; meanwhile, Some Investors choose to invest periodically. But, Which is best for you? SIP or Lumpsum? lets find out.
In this article, we will learn what the Lumpsum and the SIP investment are and analyze their approaches for better investment decisions.
Table of contents
SIP and Lumpsum Meaning:
SIP is one of the most popular investing techniques that lets you invest your fixed capital (money) from time to time. On the other hand Lump sum is a technique in which you invest all your capital at once. Let’s explore the investment techniques of SIP and Lumpsum with some scenarios to understand it better.
What is a Systematic Investment Plan (SIP):
SIP or “Systematic Investment Plan” is one of the most popular investing techniques that lets you invest your capital in a disciplined manner. This technique allows investors to invest a fixed amount of capital regularly, making it a disciplined approach. The fixed amount is invested regularly such as Monthly or quarterly. The SIP technique allows small investors to invest their capital. SIP can be started at the lowest 100 Rs for Mutual Funds Schemes.
Its Disciplined approach helps investors to reduce the risk of losing invested amounts because money is invested regularly and at different market prices. Making it the ideal approach for long-term investment.
key-points
- SIP is a technique in which you invest a fixed amount (as per your will) periodically. i.e. same date every month or (a period which is set by you).
- Disciplined systematic investment.
- SIP amount can be as low as 100 Rs for some Mutual Funds Schemes.
- Ideal for Long term.
What is Lumpsum:
SIP is a technique in which investment is made at regular intervals where as Lump sum is a technique in which an investor invests capital at once only. In this technique, a significant amount of money is invested at one price, and at one time only.
The lump sum technique’s one-time approach method makes the investment easy but the investment increases the chance of negative return. There is a saying “When there is a high risk, there is high profit”. This type of investment can give more return than the SIP investment approach.
SIP and Lumpsum: Which is better?
In the world of investing, every investor has a unique mindset, risk tolerance, and set of goals. To help you better understand the profit potential and risks associated with SIP and lump sum investments, we’ve outlined a few scenarios. Take a look below!
SIP and Lumpsum Scenarios for positive returns and negative returns:
We have assumed a few scenarios below in which we have assumed 5 months returns in percentage (%) and fixed amount for SIP of 500. Meanwhile on the other hand We have also made a scenario where we invested 2,500 Rs at the beginning of the 5 months.
Now, let us assume, the scenario of 5 months in the picture below and understand the approaches of SIP and Lump sum through the positive and negative return scenarios.
Scenario one: Positive Return on Investment
SIP APPROACH
Imagine We started an SIP of 500 Rs and invested it on a fixed date of the 4th day of every month.
| Date | Invested Amount | 1 Month Return | Total Invest- ment (After 1 Month End) | Return on Invest- ment (%) |
|---|---|---|---|---|
| 04/01/2024 | 500 | 10% | 550 | 10% |
| 04/02/2024 | 500 | 5% | 1,102 | 10.25% |
| 04/03/2024 | 500 | -5% | 1,522 | 1.47% |
| 04/04/2024 | 500 | 3% | 2,082 | 4.10% |
| 04/05/2024 | 500 | 5% | 2,711 | 8.44% |
Imagine we started a SIP of 500 Rs and fixed the date of the 4th day of every month then
We can see that our Return on Investment after 5 months is 8.44% after a few ups and downs per month. In the first month, We had assumed that we got 10% on our SIP’s first installment of 500 Rs. Hence, our total investment amount was 550 Rs after the month’s end.
Similarly, We invested 500 Rs again as per our SIP’s fixed amount at the beginning of the next month and we continued to invest 500 Rs monthly. Therefore, Our Total Invested amount is 2,500 Rs after We invested 500 Rs each month and We had 2,711 Rs amount in our SIP investment scheme because we received 8.44% on our investment.
Now let’s compare the same period and the same return every month if we had invested 2500 Rs at once (using the Lump sum approach).
Lumpsum APPROACH
Imagine, We invested 2,500 Rs at the beginning of the year.
| Date | Investing Amount | 1 Month Return | Total Invest- ment (After 1 Month End) | Return on Invest- ment (%) |
|---|---|---|---|---|
| 04/01/2024 | 2,500 | 10% | 2,750 | 10% |
| 04/02/2024 | – | 5% | 2,887 | 15.50% |
| 04/03/2024 | – | -5% | 2,743 | 9.73% |
| 04/04/2024 | – | 3% | 2,825 | 13.02% |
| 04/05/2024 | – | 5% | 2,966 | 18.68% |
A 10% more return than the SIP approach!. We have seen that SIP of 500 Rs every month only gave 8% return while Lump Sum is giving 18+% return for the same period. We had invested our 2,500 Rs only once at the beginning of the year and those 2,500 Rs investment turned into 2,966 Rs. This means we gained 466 Rs on our invested amount of 2,500 Rs in 5 months only.
What we have understood from the above Positive return Scenario?
- SIP only started with 500 Rs at the beginning and continued every month while in the Lump Sum approach, We needed to invest 2,500 at once to get better returns.
- The SIP approach is giving less returns compared to the Lump Sum approach.
So, After the positive return scenario we have seen it going in the favour of Lump Sum but will it be the same when it comes to the negative scenario? Let us check it out.
Scenario two: Negative Return on Investment
We have created yet another scenario to understand the SIP & Lump Sum approaches. In this scenario. We have imagined that the market is turning into red and giving negative returns on investment. Let’s check, how it turns out to be.
SIP APPROACH
| Date | Investing Amount | 1 Month Return | Total Invest- ment (After 1 Month End) | Return on Invest- ment (%) |
|---|---|---|---|---|
| 04/01/2024 | 500 | -10% | 450 | -10% |
| 04/02/2024 | 500 | -5% | 902.5 | -9.75% |
| 04/03/2024 | 500 | 5% | 1,472.62 | -1.83% |
| 04/04/2024 | 500 | -3% | 1,913.45 | -4.33% |
| 04/05/2024 | 500 | -5% | 2,292.78 | -8.29% |
In this negative scenario, we can see the Market is giving a negative return in 4 months out of 5 months.
This approach tells us that our SIP technique is giving us a negative return of more than 8% after the end of 5 months which means we invested 2,500 Rs in total but we lost around 200 Rs.
How much the Lump sum approach would have given the return for the same period and the same return if we had invested 2500 Rs at the beginning of the year?
LUMP SUM APPROACH
| Date | Investing Amount | 1 Month Return | Total Invest- ment (After 1 Month End) | Return on Invest- ment (%) |
|---|---|---|---|---|
| 04/01/2024 | 2,500 | -10% | 2,250 | 10% |
| 04/02/2024 | – | -5% | 2,137.5 | -14.50% |
| 04/03/2024 | – | 5% | 2,244.37 | -10.23% |
| 04/04/2024 | – | -3% | 2,177.04 | -12.92% |
| 04/05/2024 | – | -5% | 2,068.19 | -17.27% |
After the negative scenario of the Lump sum approach. We can understand that after the 5th month, the Lump Sum investing approach is giving -17% returns. that makes our investment of Rs 2,500 go down to 2068 Rs. This means We lost over 400 Rs in this One-time approach method.
What did we understand from the above Negative return scenario?
- The SIP approach has saved us from getting into a huge loss.
- The Lump Sum approach is more riskier than the SIP approach.
Now that we have learned the SIP and Lump Sum along with its scenarios. From that, We can differentiate a few things between SIP & Lump Sum. They are as follows :
Difference between SIP and Lumpsum:
| SIP | Lumpsum |
|---|---|
| A fixed amount is invested periodically | A significant amount is invested at once |
| SIP can be done with low investment | Lump Sum technique is good for bigger investments |
| SIP is likely to give lower returns | Lump Sum is likely to give higher returns |
| The chance of losing money is less. The SIP approach comes at a lower risk | Higher return means higher risk. Risk is higher with the Lump Sum approach |
| Long-term investment is better with the SIP technique | This technique is better for short-term as well as long-term investments |
Key Takeaways
- SIP = Systematic Investment Plan.
- As the name suggest SIP means the investment is planned systematically which means investing fixed amount at intervals.
- Lump Sum is one time thing. Which means investing the capital at once.
- SIP is less riskier than Lump Sum.
- Lump Sum can give higher return than SIP method.
- SIP is beneficial in longer term.
- Lump Sum is beneficial for long term as well as short term but it comes with higher risk.
So, SIP or Lump Sum which one you will invest in? We hope you found this article helpful in understanding the investing techniques in a better way. For any article related query, you can give us feedback.
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