One of the biggest conflicts among retail investors is deciding between SIP and lumpsum mode of investment. Both these modes of investments have its own sets of pros and cons. Choosing between the two might seem challenging, but it is not impossible. The right investment mode is decided basis your risk appetite, investment horizon, financial goals, if your income or salary is regular or not, market conditions, market sentiments, and other factors. Let’s understand which mode of investment is better and which works better in what situation. Read on to know more.

What is SIP?

Systematic Investment Plans, commonly referred to as SIP are systematic and disciplined mode to invest in mutual funds. SIP investments allocate a predetermined sum of money at regular intervals for a predetermined investment tenure. So, in essence, on a particular date set by the investor, a specific amount is debited from the investor’s bank account and invested in desired mutual fund schemes.

What is lumpsum?

Lumpsum investment is when you invest your entire investment amount in one go. In this mode of investment, you invest a substantial amount before the start of the investment.

Which investment strategy is ideal under what situations?

SIP is ideal for situations when the markets aren’t too high and there is an element of time-diversification. On the other hand, a lumpsum investment is ideal during the early stages of a bull market phase as a substantial amount of money is invested in one go.

The SIP method of investing takes advantages of the volatility in the stock market. The reason is simple. As SIP investments invest in mutual funds across market cycles, an investor ends up investing in both the bull market phase and the bear market phase. As a result, an investor purchases higher units of the mutual funds when the markets are low than when the markets are high. This investment concept is popularly known as rupee cost averaging. SIP mode of investment might also be ideal in situations when the returns on the markets are negatively co-related, as in the theory of mean reversion principle.

Mean-reversion principle

Under this principle, SIP investment is presented when the mutual fund units are increased after the markets have taken a hit. It is specifically attractive when investing during volatile markets over a prolonged period of time.

One should note that lumpsum investments have the potential to generate significantly higher returns than SIP investments when invested at the right time in the right investment options. This is because under lumpsum investments, the investment amount is entirely invested and as it is uniformly invested, it has comparatively lower volatility.

Whether you decide to move forward with SIP mode of investment or lumpsum mode of investment entirely depends on your investment portfolio, financial goals, risk appetite, age, availability of funds, whether you have a regular source of income, market conditions, market sentiments among other factors. Happy investing!