SIP vs lump sum: Which investment strategy wins the race for middle-class investors?

The dilemma of whether to invest through a Systematic Investment Plan (SIP) or lump sum often plagues novice equity investors, especially middle-class professionals. This piece seeks to unravel the mystery and determine which approach can yield superior returns. 

Amit Gupta, Managing Director at SAG Infotech, says lump sum investing involves pouring all your funds into the market simultaneously. For instance, if you have Rs 1 lakh to invest in the Nifty 50 index fund, you purchase a proportionate number of units, and your investment tracks the Nifty 50 index. “On the other hand, SIP entails regular, periodic investments. Say you want to invest Rs 25,000 every month in the Nifty 50 Index Fund for 10 years. This amount gets deducted from your bank account monthly and is invested in the scheme on a specific date. You receive units corresponding to your monthly investment and the net asset value (NAV) for that month. These units accumulate and appreciate over time.” 

SIP offers cost averaging, providing more units when markets are down and fewer when they’re up. Lump sum investments might outperform in continuously rising markets. 

“A long-term analysis of NIFTY 50 data reveals varying performance between SIP and lump sum investments. No method consistently outperforms the other due to market conditions and volatility,” says Gupta. 

This dispels the common myth that SIPs always generate better returns. Instead, SIP is just another investment method, not a guaranteed return generator. 

Besides, Aniruddha Bose, Chief Business Officer, FinEdge, says, “In the long run, a systematic and disciplined approach to investing in equities is better than investing lump sums. Although lump sum investments can be very rewarding if you are lucky enough to get the timing right, they inherently encourage a speculative mindset that can quickly bring about an investor’s downfall.” 

“Because markets are unpredictable and the timing the market is impossible, lump sum investors end up succumbing to a number of greed and fear-driven behavioural biases. For instance, very few investors actually mustered up the courage to put in a lump sum of money 3 years ago when the pandemic led to an unprecedented crash, simply because nobody knew how deep the cut would be! Most people sat on the fence waiting for markets to stabilise, only to miss the bus because the relief rally was so sharp,” adds Bose. 

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On the contrary, SIP investments tend to be more goal-centric than returns-centric. The mindset of SIP investing is more long-term and disciplined, and so SIP investors tend to be a lot more resilient and able to withstand the ups and downs of markets. Hence, systematic investing is a much better idea for equities. 

What should you do?  

Both SIP and lump sum are investing methods that cater to diverse financial goals, risk tolerances, and investment horizons. SIP allows frequent, modest investments at regular times, which can help lessen the impact of market volatility. It is typically seen as a low-risk method. It is not necessary to time the market. You invest on a consistent basis, regardless of whether the market is rising or falling, which might limit the influence of market timing. It’s also good for long-term objectives because it takes advantage of rupее cost averaging. It can give a more consistent and predictable growth path over time. 

Investing a significant quantity of money at once, on the other hand, represents a larger risk because the entire investment is instantly subject to market swings. In turbulent markets, lump sum investments might be riskier. Market timing may have a considerable impact on this sort of investment. If you invest at a high point in the market, it may take longer to realise significant profits. Lump sum investments may be appropriate for short-term or immediate financial demands, but they also offer the potential for higher long-term returns if planned right. 

Aastha Gupta, CEO of Share India FinCap, says, “There is no one-size-fits-all solution to whether SIP or lump sum is preferable. It is determined by your own financial objectives, risk tolerance, investment horizon, and market forecast. Individuals should invest based on their cash flows. If you are a salaried professional drawing a monthly salary, investing through SIPs would be an ideal route of investment. However, if you have a lump sum amount that you wish to deploy in equity markets, investing it in one go can be a better choice than investing it in instalments. Keeping the money idle in your bank account may have an opportunity cost, which can lead to a lower corpus over the long term. To balance risk and profit, many investors use a combination of both tactics.” 

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Thus, investors should prioritise investments over financial planning strategies. “For salaried individuals or middle-class earners, SIPs are ideal, allowing gradual investments without financial strain. For those with a lump sum, investing it all at once is wise, as idle funds may result in lower long-term gains. The time value of money underscores the advantage of lump sum investments. While some suggest splitting a large corpus into equal monthly investments, it’s not foolproof. A market rally during those months may increase your average cost. Thus, investing the lump sum is advisable for long-term investors with substantial sums, provided they have patience and a long-term horizon,” says Gupta.