Two options that are extremely popular among mutual fund investors areSystematic Investment Plan (SIP) and lump sum. Each comes with its own set of advantages and disadvantages, and the decision between the two is not just based on your investment goal but also on the current market situation.
For an investor, it is crucial to know when to choose SIP or a lump sum to maximise the returns. In this blog, we will compare SIPs and lump sum investments and see how to align your strategy based on varying market situations.
What are SIP and lump sum investments
- SIP: You invest a fixed amount in a mutual fund at regular intervals, averaging the cost of purchase over market cycles.
- Lump sum investment: You invest a lump sum amount at one go, expecting to earn from market appreciation in the long run.
Both are good options, but their performance would heavily rely on market timing and conditions.
Why SIP succeeds in volatile markets
SIPs are the best choice when the markets are volatile.
Systematic investing allows you to buy more units when the price is low and fewer units when the market price increases. Thus, rupee-cost averaging reduces your average purchase cost over the long term.
That’s why SIPs are most appropriate for:
- Long-term wealth creation (5+ years)
- Investing in volatile markets
- Minimising emotional decision-making
Lump sum: Best for bear markets
If markets correct sharply, following a global crisis, political unrest, or economic slowdown, a lump sum investment can help. It is usually the best time to invest additional money when the market is at its lowest as it helps in getting more returns when the market corrects over time.
Lump sum investments are appropriate when:
- Markets experience a significant correction, providing an opportunity to invest at lower valuations.
- Broader market valuationsalign with or fall below their historical averages, indicating reasonable entry points.
- You possess excessive cash and a long-term perspective.
Example
Supposethe market crashes in 2025, and investors invest a lump sum and buy more units. In 2026, if the market rises, the same investors will reap more benefits.
When to shift strategies
| Market condition | Preferred strategy |
| Volatile, or gradually rising markets | SIP |
| Sharp correction or deep bear market | Lump sum (if you have surplus cash) |
| Overheated bull market (high valuations) | SIP (stay disciplined) |
Importance of your investment objective
Market conditions are secondary to your investment objective, investment duration, and risk tolerance. Here’s how you should decide your investment plan:
- Long-term (5+ years):SIP performs well regardless of market timing.
- Short-term (1-3 years):Market timing becomes increasingly important as lump sum investments can be a good choice if markets are favourable.
Conclusion
For investors, the choice between SIP and lump sum investment needs to evolve according to personal financial objectives and market conditions. Perfect market timing is difficult to achieve, but having SIP discipline with occasional lump sum investments can provide the best of both worlds.
