Systematic Investment Plan (shortened as SIP) and Lumpsum Method are two incredible methods of investment that are very popular in India. The word SIP has the same meaning as Systematic Investment Plan, where by Lumpsum meaning to pay something in one go. These two methods are regulated by some sort of policy, this makes it very easy for people who do not have considerable knowledge about this subject to make decisions, about what method to choose to invest through with known needs and constraint.Having these two types of investment methods compared, this is like a manual about The Systematic Investment Plan Methods and Lumpsum Method with a correlation, comparing them by the policies they both operate with, the rate at which their returns are recorded, the strategy implemented for both Systematic Investment Plan (SIP), and the Lumpsum Method.
Systematic Investment Plan (SIP) means to plan your monthly investment in your financial product (mutual fund) irrespective of the changing conditions of the equity market (which is popular as “cost averaging”). This is ideal for those who are having a regularly recurring income. Monthly, Quarterly, and Yearly mode of subscription to this plan is a common thing.
The other mode of investment is lumpsum investment; which is opposite of the above. it means investing a large amount of money once in a single financial product of your choice. which is ideal for the people who have a large amount of money to invest and are able to invest the amount just once and leave it.
Both types of investments need to observe the rules laid down by SEBI. SEBI laid all these rules and Regulations for the benefit of the investors, protecting them from deviant behaviours of the promoters. A few of these Sebi regulations for SIP investments are ‘KYC’, which means that the details of the investor (identity and address) are verified and followed even when he invests through SIP. This is the case for the Lumpsum investments as well. Within this KYC system, rules and regulations for both types of investment apply.
The prospective return of SIP is usually lesser than that of lumpsum. But when we make lumpsum investment, if it is at a market low, then the entire amount shall benefit if the market increases, resulting in potentially higher return. Lumpsum investment owing to its pure market timing carries the most risk as compared to other calculations or strategies. If one invests money in the market at a market high, the losses can be extremely high.
SIP investments come with the benefit of rupee cost averaging to mitigate this risk. Since SIP investors put in smaller amounts regularly, they buy in more units when prices are low and fewer units when prices are high. This makes for a steadier average, since the impact of market volatility gets spread out over time. Hence, while the returns on a SIP investment may be lower than those on a Lumpsum investment made with a better sense of market timing, it is still a safer way to invest, especially for investors who are averse to risk.
| Criteria | SIP | Lumpsum |
|---|---|---|
| Investment Amount | Smaller, regular investments | One-time large investment |
| Market Risk | Lower due to rupee cost averaging | Higher, dependent on market timing |
| Flexibility | High, with adjustable contribution amounts | Low, once invested |
| Return Potential | Moderate, stable over time | High, if timed correctly |
| Best For | Investors with regular income | Investors with a large sum of money |
Investors are more likely to choose SIPs based on their financial ability and some financial discipline to invest regularly investing and on the other hand ‘Lumpsum’ is considered as best in terms of cash flow also. The same amount of investment in SIPs will be made in Lumpsum with a higher risk of falling down then in SIPs. Some good and bad aspects of SIP Vs Lumpsum investments are as follows – SIPs are suitable for those individuals who have a regular monthly income with a low sense of risk. It lets a person invest with some financial discipline and SIPs could be very good for those with a steady income but low capital.
Lumpsum is suitable for most of the investors looking from a cash flow perspective also. Investors with more capital would dip their entire amount into the market and have a good amount available for some good schemes as compared to SIPs.
Taxation is another important consideration in India when comparing SIP vs lumpsum, and equity investments are taxed similarly for both these investment plans. Long-term capital gains (LTCG) — that is, profits from investments above ₹1 lakh in a financial year (cumulative in the case of SIPs) — are taxed at 10 per cent, excluding the benefit of indexation. Short-term capital gains (STCG), on the other hand, is taxed at 15 per cent if the holding period is less than a year.
Since an SIP investment constitutes a number of lump sums over a period, each re-investment of the instalments is construed as a separate investment, with a holding period calculated for each of these installments. If you have invested in an SIP over several years, then different parts of the larger investment may have a tax rate levied under different slabs depending on when these parts are redeemed. A lump sum, by contrast, always constitutes a single holding period, making the calculation of capital gains tax simpler.
There are pros and cons to each type of investment and there is no clear winner. For example, SIP suits an investor who has a steady income to invest but is wary of risk. On the other hand, Lumpsum is suitable for a person having a lump sum amount and who is okay with risk. There are factors to consider other than just the investment platform. In volatile times, Lumpsum might not be suitable but settlements cannot be postponed. Hence, the investment and investment product depends on the financial goal and risk profile of an individual. SIP and Lumpsum both have their advantages and disadvantages.