Suppose I need to invest in a mutual fund. There are two ways to invest. Lumpsum or SIP.

Lumpsum: I invest the entire sum at one go.

SIP: SIP stands for Systematic Investment Plan. Here I invest a fixed amount at regular intervals (usually monthly).

Let’s understand it using an example. First Net Asset Value or NAV. For a mutual fund, It is the market value of investments divided by the total number of units issued.

Month-1: NAV is Rs 20 per unit.

The first month’s SIP investment of Rs 20,000 will get us 1,000 units (20,000/20 = 1,000).

Month-2: NAV is Rs 40 per unit

The second month’s SIP investment of Rs 20,000 will get us 500 units (20,000/40= 500).

Month-3: NAV is Rs 10 per unit

The Third month’s SIP investment of Rs 20,000 will get us 2,000 units (20,000/10= 2,000).

Therefore, at the end of 3 months total investment = Rs 60,000

Total number of units: 3,500.

Month-4 NAV: Rs 35

Total value of investments: Rs 3,500 * 35 = Rs 1,22,500

Total investments: Rs 60,000

For a lumpsum investment of Rs 60,000 on month-1, the total number of 3,000 units will be allotted (60,000/20= 3,000). Therefore, the total value of investment at month-4 would be Rs 1,05,000.

SIP Investor:

An SIP investor is someone, who is not thinking about timing the market. Whether the market goes up or down, sentiments are positive or negative, he/ she is least bothered. He/ she will invest a fixed sum every month to a particular asset class (here, mutual fund) at a fixed date. He/ she believes in long-term compounding in the market and stays invested for long-term. By investing monthly, he/ she gets the benefit of rupee cost averaging (in the above example, the investor gets to invest at a lower level in month-3). He need not be an expert timer of the market. He is so busy with his other ventures that he has no active involvement in the market. He need not keep himself updated about the market.

Lumpsum Investor:

A lumpsum investor is someone, who is confident about market levels. He has decided that the market is low, so investing a big amount at this level will get him good profits when markets go up. In reality, he is taking a higher risk by betting a higher sum, because he is assuming a higher probability of returns.

So, SIP investor does not care about market levels, because he/ she is investing at all levels. Lumpsum investors need to be cautious about market levels. It is true that however people boast, no one can predict the market movement correctly everyday.

Which is better?

By now, you must have decided what is better for you, Lumpsum or SIP investment. If you are still undecided please read below.

• If you are salaried, that means you can invest a fixed sum regularly (monthly). Since you have clear visibility of your income and expenses. You can estimate the monthly amount for investment. In this case, SIP suits you. But if you do not get any regular income, you can invest through Lumpsum.  
• If you have little to no knowledge of the market, invest through SIP. But if you consider yourself an expert in the market, then you can try for extra returns by investing through Lumpsum.
• If you can not bear a 10%-20% loss in your portfolio value, that means your risk appetite is not much. Invest through SIP only. On the other hand, if you can bear with short-term loss in value of your portfolio value, in anticipation of higher returns in the future, that means you have sufficient risk appetite for market fluctuations. Then invest through Lumpsum.

Still Undecided?

If you are still undecided and need my help in deciding. My take is to invest through SIP mode. If you are salaried, then estimate a fixed sum every month and set it on autopilot. Autopilot means, that every month your investment platform takes that fixed sum and invests in your mutual fund.

What if you got a big sum of money, say received a bonus or received from family? You still need to use the SIP method. For example, you received Rs 1,00,000 and now looking to invest this amount. Now if you are investing Rs 25,000 per month through SIP, then you should invest an additional Rs 25,000 for 4 months to deploy Rs 1,00,000. There is no hard rule, just you need to spread big investments into smaller chunks, so as to avoid sudden loss in value due to market collapse (remember, this has happened several times in history and may happen the next day of your investment).

Even if you are not salaried, the same method applies to you too. If the amount is smaller (up to Rs 50,000), invest in one go (Lumpsum). If the amount is larger, divide the amount into 4-5 equal parts, and every month, invest a part. You will get the benefit of rupee cost averaging, in case of a falling market.   

What do you think, please let me know.