Systematic Investment Plan versus Lumpsum Investing

In our previous blog on Lumpsum Investing, we discussed how the concepts of SIP and Lumpsum investing are different, with the example of a Television Serial and a movie in the theatre.

Today, let’s discuss how Systematic Investing and Lump sum investing style differ from each other?

SIP versus Lumpsum Investing:

Different Community of Investors:

As both are different in their approach, both the investing styles have different investors opting for each. While SIP is suited to investors with a regular source of income and wishes to invest in parts, Lumpsum Investing helps the investors who don’t have a regular source of income and wishes to invest the surplus available at one go.

Suitability for budding young investors:

The first-time investors or beginners do not have the required set of knowledge, experience and skills to time the market, but they earn a regular income, hence, Systematic Investments via SIP is the best investment option. On the other hand, there are seasoned investors who have spent the time in the markets during the bull and bear runs, and also have definite financial goals and a long-term view. That is why Lumpsum Investing is suitable for Seasoned investors.

Averaging out or Value Investing:

SIP follows the rule of Rupee Cost Averaging. This means investing through the SIP route averages out the cost of investment across bull and bear runs in the market. Alternatively, Lumpsum Investing works on the principle of Value Investing. This means, invest more during bear runs and less during bull runs. Seasoned investors with a long-term perspective, can hold on to their investments across market cycles and unlock the best potential returns.

Impact of Power of Compounding:

Compounding is said to be the eighth wonder of the world. While the power of compounding works for both the investing styles, the SIP investor is at a disadvantage to Lumpsum investors as far as the impact of compounding is concerned. Since SIP is done systematically at regular intervals, the first SIP Instalment will have more time to compound compared to further and the last ones. While Lumpsum Investing has an extra edge due to investment of the entire amount at one go. Such structure helps the entire amount to reap the benefits of compounding, that too for the entire period for which the investment is made.

The “Fear” Psychology

Disciplined Investing with SIP helps remove the “fear” which prevails in the investor’s mind while investing at one go. The amount invested via SIP averages out towards the tenure of SIP. Also, as the SIP installments are paid in parts, the investors generally don’t have the burden of arranging a large chunk for investing. While investing in lumpsum, the investor generally runs through the “Fear” Psychology of loosing out either on the correct opportunity to invest or making a wrong exit.

Both Systematic Investing and Lumpsum Investing have unique features that help wealth creation. It is up to the investor to check their own risk-bearing capacity, financial goals and availability of investment surplus and go with the best fit.

Please wait...

Join the Informed Investors Community

Investing without research is like playing poker, without looking at the cards.