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Kolkata: Though Lump sum versus SIP is a favourite debate among small investors and many tend to believe that lump sums generate a higher return, a personal finance expert Ritesh Sabharwal has argued that there are some facts beyond what the numbers state and that one should take note of it. There is no debate if one crunches numbers -- lump sum investments emerge as the clear winner. In 10 years, assuming 12% returns, the Rs 5,000 SIP will generate a total value of Rs 11.61 lakh, but the lump sum investment of Rs 60,000 will swell to Rs 12.30 lakh in the same time period, making the latter richer by almost Rs 70,000.
While there is no quarrel with the numbers, the real-life problem lies somewhere else. Most people won't have Rs 60,000 ready at hand to invest. Most investors in mutual funds are salaried individuals and they don't have such a sum to spare, he has pointed out. If someone argues that one can easily amass Rs 60,000 by setting aside Rs 5,000 a month, it so happens that it becomes difficult to keep the money safe aside. Often it is fully or partly consumed by sundry expenses such as a festive gift or a short trip.
This is why SIPs suit most people. The amounts are relatively small and can be tailored to one's convenience after taking into consideration one's income and expenditure patterns. Automated investments work the best and in investment consistency is the main weapon which SIPs ensure. Sabharwal pointed out that SIP is a method of investment where the very structure protects it from the impulses and whims of the investor.
SIPs have another advantage. Since they work across big time periods, they iron out the unevenness seen in market conditions -- ups and downs -- to work out a long term average cost for the investor. The concept is simple -- when the prices (NAV or net asset value of a mutual fund scheme) rise, the investor buys fewer units but when the prices fall, the investor can make up by buying more units with the same amount of money. Another way of looking at downturns is that they allow the investors to buy more units and the longer they stay depressed, the better for investors, in a way unless they need to redeem the units when the NAVs are down.
Lump sum investing makes sense when a couple of conditions are met. One, when the individual has the required money at hand such as payment of bonus or a bank FD maturing. Two, the market is in a decline and lump sum investments would help generate higher returns. Any lump sum investment can deliver the best returns when it is invested when the market is down -- following almost the same logic as equities.
Therefore, one can try to mix match both lumpsum investments and SIP. Say, a sizeable bonus can be split in two parts -- one part can be used for lump sum investment while the other can be used for the SIP mode.
(Disclaimer: This article is only meant to provide information. TV9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, REITs, INVITs, any form of alternative investment instruments and crypto assets.)
