“Should I do a SIP or invest a lumpsum?” is one of the first questions new investors ask. It is often asked as though one of the two were the superior product. They are not products at all. They are two ways of putting money into the same schemes, and the right one depends mostly on your own circumstances.
This article is about choosing between them: a SIP puts in a fixed amount at regular intervals, a lumpsum puts in one amount at one time, units are allotted at the applicable NAV either way, and how each one works is explained on our SIP and lumpsum page.
Start with where the money is
For most people the question answers itself once they look at their cash flow.
If you are investing out of a monthly salary, you do not have a lumpsum to invest. A SIP is simply the practical way to invest income as it arrives. Waiting to build up a large amount before investing usually means the money sits idle or gets spent.
If you already hold a sum, for example a bonus, maturity proceeds or the sale of an asset, then you do have a real choice: invest it at once, or spread it over a period.
What rupee cost averaging really offers
A SIP buys more units when the NAV is low and fewer when it is high. Over time, this makes your average cost per unit lower than the simple average of the NAVs on your purchase dates. This is rupee cost averaging.
It is useful, but it is often oversold. It is worth being exact about what it does.
- It spreads your entry over many market levels, so no single day determines your outcome.
- It does not assure a profit. If the NAV is below your average cost when you need the money, you are at a loss.
- It does not protect you in a falling market. The units you have already accumulated fall in value with everything else.
- It does not always do better than a lumpsum. In a market that rises steadily, money invested at the start would have done better than money fed in gradually.
If you have a lumpsum
Putting a large amount into an equity-oriented scheme on a single day means your result over the first year or two depends heavily on what the market does next. Nobody can know that in advance.
Some investors are comfortable with that. They have a long horizon and would not be shaken by an early fall. Others would find a sharp drop soon after investing hard to live with, and might sell at the wrong moment. For them, spreading the investment over several months, for example through a systematic transfer plan, can make the experience easier to stick with. The price of that comfort is that part of the money stays out of the market for a while, which costs you if the market rises.
In lower-volatility categories the entry date matters much less, and the argument for spreading is weaker.
Questions that settle it
- Where is the money coming from? Regular income points to a SIP. An existing sum gives you a choice.
- How long is the horizon? The longer it is, the less the entry date matters.
- How would you react to a fall soon after investing? Be honest. A plan you abandon in a downturn is worse than a more cautious plan you keep.
- Is your emergency fund in place? Money you may need at short notice should not be in either.
What a SIP is really good for
The strongest argument for a SIP is behavioural. It makes investing automatic, it continues when markets are falling and news is discouraging, and it removes the temptation to wait for a better moment that is only obvious afterwards. Increasing the instalment as your income grows, sometimes called a step-up SIP, keeps the habit in line with your earnings.
The short version
Use a SIP to invest from income. Use a lumpsum when you have the money and the temperament. Use both if both apply, which for many investors they do. In every case the scheme you choose, the time you give it and your behaviour during declines will matter more than the route you used to get in. Returns are not guaranteed on either route.