This question often troubles many investors as to which method will give more returns and which will have less risk. In this article, we will compare these two investment methods in depth and know which option can be more beneficial for you depending on your needs and risk appetite.
What is SIP
SIP (Systematic Investment Plan) is a method in which investors invest a fixed amount in mutual funds or shares on a monthly, quarterly, or yearly basis. It promotes the habit of regular and disciplined investment. The biggest advantage of SIP is that it does not emphasize market timing, as it works on the principle of ‘Rupee Cost Averaging’. When the market falls, you get more units, and when it rises, you get fewer units, which balances the average cost.
Magic of Compounding
The real magic in SIP investing lies in compounding. For example, if you do a SIP of ₹5,000 every month and get a 12% annual return, you can get a return of ₹1.12 lakh in 5 years, ₹5.61 lakh in 10 years, ₹16.22 lakh in 15 years and ₹37.95 lakh in 20 years. That is, an investment of ₹12 lakh can become more than ₹50 lakh in 20 years. This shows how small savings can become big in the long term.
Amazing benefits of SIP
- It is very easy to start a SIP, you can start with as little as ₹100. This method is especially useful for new investors.
- SIP develops the habit of saving as the investment is automatically deducted every month.
- It is a flexible method in which you can increase or decrease the amount.
- SIP investors do not have to worry about market timing and it also balances market volatility in the long term.
- Also, through Multi-SIP, you can invest in multiple types of funds simultaneously, thereby diversifying your portfolio.
What is a Lump Sum Investment
Lump Sum investment means investing a large amount at once. In this, the investor does not need to invest again and again. For example, if a lump sum amount of ₹12 lakh is invested for 20 years at 12% annual return, it can grow to more than ₹1.03 crore. This method is good for those who already have a large amount, such as bonus, savings or inherited money.
Benefits of Lump Sum
- Lump Sum investment does not require repeated investment. Invest money at once and the investment grows automatically.
- It is suitable for people who have a large amount of money ready to invest at once.
- Investments in it start earning returns immediately, so there is no ‘investment gap’. If you invest at the right time, you can get great returns.
Key differences and the right choice for you
Investments in SIP are made gradually, which reduces the risk and is suitable for the long term. On the other hand, investing the entire amount at once in Lump Sum can give quick returns, but the risk is also higher, especially if the market is at a high level. SIP is flexible, while Lump Sum has less flexibility. SIP is especially good for people who depend on regular income (such as salary), while Lump Sum is for people who already have a large amount of money.
