What is the meaning of SIP investment and Lumpsum investment

In this article we will discuss about what is the SIP investment and Lumsum Investment, and also tell you , which investment option is better for you.

Which investment plan we should choose?

 What are the disadvantages?

What are the advantages?

Which investment plan performs better in which market conditions?

 As an investor, all these questions must have been coming in your mind. So… in this post, we will go in detail about this and try to explain you the difference between Lumpsum and SIP investment.

SIP Investment Vs Lumpsum Investment

A quick line about Lumpsum. Let’s take an example. If you have, let’s say Rs.12,000 and you want to invest in the market, right now. If you invest all Rs.12,000 in any mutual fund or stocks in one go, that’s like, called a lumpsum amount, lumpsum mode of investing because you have invested the entire amount at once.

Whai is the meaning of SIP Investment ( Systematic Investment Plan)

 It’s very clear from the name also, that let’s say this Rs. 12,000, over the next 1 year, I invested as Rs. 1000 each per month. We will call it Systematic Investment Plan.

 Now, benefit of the Systematic Investment Plan over the Lumpsum investment  is that as you, at the end of every month, keep on investing Rs. 1000, your price of whatever you buy, mutual fund or stock, that will differ to the end of that month therefore you get the advantage of Rupee Cost averaging.

 Let’s understand in SIP Vs Lumpsum, which one is the better investment option. Which investment option you should use to get better return on investment ?

Generally, its answer depends on the market conditions. If we talk about, let’s say, rising market condition. Upward trend for the past one year or.. in the next one year. And you have made Lumpsum investment.

Understand Systematic Investment Plan  and  Lumpsum investment   with an Example:

 Let’s understand it with an example, we’ll go with the same example, of Rs. 12000. Here, Lumpsum will perform better than SIP. Because, when market rises, every month, whenever you buy mutual fund, or stock; you will buy at an increased price because you are investing Rs. 1000 every month. You will be allocated less units. Whereas  when you have put entire Rs. 12000 in the beginning, rather than 1000 distributed throughout the year; or got more units at that time only. So, here, Lumpsum performs better than Systematic Investment Plan.

 Here, it is important to know one thing, that we talked about rising market.

 Second scenario can be, when markets are falling. In this scenario, SIP is always a good and preferred method. When you have Rs. 12000 and when you put Rs. 12,000 and price per unit is 20, so, after dividing, you will know that you will get total 600 units. Here if, when market started falling, we are taking falling market scenario here. As soon as it started falling, per unit price, let’s say, became Rs. 9 from Rs. 20. So, your investment of Rs. 12,000 in Lumpsum will reduce to Rs. 5400.

 But if you would have taken the route of SIP, you would be buying more units. as the market would have been falling, every month, you would be buying more units with that Rs. 1000. So, at the end of one year compared to Lumpsum, if you had taken the SIP route you would have got more units.

Therefore, because of Rupee Cost Averaging, as you saw here, you get more units in SIP. As we have told now, in rising market, Lumpsum is better. And in falling market, generally, SIP is better.

 But, if you, let’s say, want to invest in FD, in the coming year, you will get 7-8% assured returns. In that case,  it doesn’t  matter. Whatever disposable income you got, you can put that anytime, because their returns are always assured. Whether you do Lumpsum, whether you do SIP you will get the same returns.

 Now, after seeing these three things, the question arises that… which investment you will prefer. Will you prefer SIP or Lumpsum?  like, in most of the financial market we have seen, and mostly all the people believe that if you can time the market, then Lumpsum is always the best investment options for you. But, many people indeed try to time the market, but no one can do it. Therefore,  you should always try and adopt the method of SIP.

Because when you cannot time the market, then you don’t know that if the market is going to rise or it’s going to fall in the coming time. Therefore, always invest via SIP method so that every month, whatever you want to invest whether want to invest Rs. 100 or in some month, want to invest Rs. 1000 it will be distributed throughout the year. And in this way, you will be doing Rupee Cost Averaging.

Whether market falls or rises, you will always get better return on investment, over the long term, through SIP method,  as compared to lumpsum method.

Advantages of SIP investment over the Lumpsum investment

Now let’s understand what are the advantages of SIP over the Lumpsum investment.

1. The first big advantage is you don’tneed to constantly watch the market don’t need to time the market.Like we have told you just now, when you invest Lumpum, it may happen that today youhave invested Rs. 10000 Lumpsum and market crashes tomorrow. So… It will be a freefall and your… whatever capital you have invested Lumpsum it can go down… a lot downand you can be in big losses. But, here, had you invested through SIP method, you could be saved from such market crashes. Because when market crashes, when you buy through SIP again, then you will buy at a very low point.So, you will get more units. So, there is not much meaning in timing the market and this is the biggest advantage of SIP over the Lumpsum.

2. The second advantage is, like we told you, Rupee Cost Averaging. In different market conditions, SIP helps in doing better Rupee Cost Averaging. which is like, when market is rising you buy units at higher price, but when market is falling, or standing sideways, you buy units at lower price in falling market conditions. So, this averages your rupee cost as well which is not possible in Lumpsum method. Because you at one go, you have invested entire amount in the market, or stock or mutual fund.

3. The 3rd biggest advantage is, through SIP, a prudent habit is formed, an investing habit which is very much necessary now a days so that in the long term, you can enjoy lots of benefits from it. Whatever disposable income you have, in any month. You may have Rs.5000 in a month in some, you may have 10,000, or 15,000 in some, you may not have any money… to invest in a stock market or to put it in a mutual fund. In such case, whatever disposable income you have, you.. in regular intervals, every month, can put in through SIP (Systematic Investment plan).

This will make a habit for you, this will be beneficial in your long term investment, in long term profits.

Myths about SIP Investment

 in the last, we will talk about what are the myths about SIP investment, in the minds of people or investors. The first point we will discuss is “SIP is for small investors only.”

1.  Myth number one. It is not at all true. Though all mutual funds or most of the financial instruments have very low minimum price. Like, you must have seen, 500, 100 or one thousand. But it doesn’t mean that you can invest only in these amounts. You can start SIP with 1 lakh, 2 lakh, even 10 lakh. If you are saving 1 lakh per month, you can put 1 lakh in SIP. It’s just that you will buy at the price of 500 or 1000, which is its NAV, so you will get more units.

It’s not like that SIP investment is made for only small investors. You can start with any amount.

2. The second biggest myth is, that SIP investment and… Lumpsum are different investments, altogether. It is not like that at all. The first point is, underlying both can be… a mutual fund or any asset class.e.g.it can be  mutual fund or even a stock. When you invest through SIP or Lumpsum, they are not different investments, they are different ways to invest in that particular underlying.

open upstox demat account
open upstox demat account

Here, underlying is the same, it’s very important to know this thing. In this case, underlying is mutual fund or smallcase. To give an example, e.g. you bought a laptop, and your friend bought the same laptop. Friend paid whole cash and you bought on EMI. Here, underlying is a laptop,which is the same. But your friend paid the Lumpsum through cash and you bought it on EMI. which is a SIP mode, let’s say. In this way, when you buy on EMI, you can do it by SIP. You are paying systematically every month for that laptop. Here, Underlying is same, method is different.

3. The third myth, Its tenure and amount, when set, cannot be changed. It is also a completely false myth. Because, when you set SIP for the first time even if you set with a very low amount, 500, 1000, 10,000 whatever it is, monthly, you can change that amount anytime. Investors always have this liberty that if he or she wishes, can change the amount from 10,000 to 5000 and if he wanted to increase, can make it 15,000, 20,000 and any number.  

And even if you have set a SIP already, let’s say, you have set a SIP that every month, you have to buy Rs. 5000 worth of mutual fund for the next one year. You will have payments 12 number of times. In 12 months, you will pay 12 times. But if you wish, you can change your tenure even after six months and let’s say, you can stop all the payments after six months. Even, if you want, you can change the… amount also. If you have started initially with 10,000 you can make it 5,000. It’s a big myth that amount and tenure cannot change. But, as I told you, both the things can change in many ways.

That’s the end of this article “sip investment vs lumpsum investment” . If you found this article informative and helpful then don’t forget to share it with your friends and on your social media accounts.

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