What is the difference between a SIP and a lump sum investment?
Short answer
A SIP (systematic investment plan) invests a fixed amount at regular intervals, such as monthly. A lump sum invests the whole amount at once. Neither is better in every case; the result depends on how prices move.
Most relevant for: भारत (India)
Two ways to invest the same money
With a SIP, an investor commits to buying a fund or security with a fixed sum on a schedule, commonly each month; in India SIPs into mutual funds are widespread. With a lump sum, the investor puts in the whole amount on one date. The same idea outside India is usually called dollar-cost averaging.
How averaging works
A fixed sum buys more units when the price is low and fewer when it is high, so the average cost per unit over time sits below the simple average of the prices paid. This is called rupee-cost or dollar-cost averaging. It reduces the risk of committing everything just before a fall, and it builds the habit of regular investing.
A lump sum is exposed to the market for longer. If prices rise steadily, an early lump sum usually ends up ahead because more money was invested for more time; if prices fall first, a SIP can fare better. Which happens cannot be known in advance.
| Feature | SIP | Lump sum |
|---|---|---|
| Timing | Spread over many dates | One date |
| Entry-price risk | Averaged | Concentrated |
| Time invested | Shorter on average | Longest |
| Cash needed | Small regular amounts | A large amount at once |
The future-value formula
If a SIP invests P at the start of each month and earns a constant monthly rate i, the value after n months is given below. Illustrative arithmetic only, using an assumed rate and not a forecast: 5,000 a month at an assumed 12% a year (i = 1%) for 12 months grows to about 64,047, from 60,000 invested. Real returns vary and can be negative.
FV = P x [((1 + i)^n - 1) / i] x (1 + i)