Several times, when we start to invest in mutual funds than we are confused between which mode Sip or lumpsum in mutual funds is better for our growth.
Do you know? as per data mutual funds investments got risen more than 25% over 5 years in our country where gold and real estate were given more importance.
Why mutual funds are one of the best investment options?
Because as per sources over the period of time it has given more than 10% returns annually.
From which mode we will get good returns according to our goal based investment.
Therefore, in this blog, we are going to answer all your queries regarding the sip or lumpsum in mutual funds and suggest some ways to predict which is better at which time.
Things here for me.
- Difference between sip or lumpsum investment?
- The right time to choose sip or lumpsum investments.
- How to find when is market cheap or costly.
- Which one is the best Sip or Lumpsum in mutual funds?
- How do we know this Price to earning ratio of the index?
- Why you should choose sip investment in the mutual fund.
- Things better in lump-sum investment.
- What you can do for better returns from the mutual fund.
- FAQ’s
What exactly meant by a sip or lumpsum in mutual funds?
For this, we have to understood the meaning of Nav (net asset value):-
Net Asset Value(NAV).
Nav is the most often term which means In layman”s language it is the price at which the investor buys one unit of a mutual fund the same as in the stock market the share price of the company.
For more detailed concept clarity see Terms related to mutual funds.
Sip (systematic investment plan).
Sip means a recurring deposit into your selected mutual fund in which money is deducted through your bank account and got invested each month in that mutual fund.
In this type of investment, the units of the mutual fund which are allocated changes as per the market Nav value at that time.
Because your sip is deducted and fresh sip is made each month at different Nav’s according to the market conditions.
Also if you want to learn more about mutual funds the go through this post of understanding the mutual fund.
For example:-If your sip is deducted 5th on every month so the units allocated into your account of your selected mutual fund will change each month and depends on the value of nav on the 5th of that month.
Lumpsum Investment.
Lumpsum is a type of investment in which a total one-time investment is made into your selected mutual fund like ₹100000(1 lakh) at that time.
The units are allocated at the current NAV according to market conditions.
In this type of investment, the nav remains the same and units allocated do not change like in case of sip type of investment.
When to choose between sip or lumpsum in mutual funds investment.
The investment method in mutual funds is to be chosen depending on the market volatility rate(Ups and downs in the market) and its conditions.
Sip can be done at any point in the market because it works on rupee cost averaging in which returns got average out in the long run as units are allocated each money at fresh Nav of that month.
Lumpsum is done when the market is low because more units are allocated when the market is low and hence more profit will be there at the end when the market rises.
For example, let’s a closer look at the nifty50 (benchmark index) chart of the previous years.
Here, you can see if you would have invested as a sip in the peak of the market in 2007 than definitely, you would have gained good returns over a time horizon of 10 years.
But in lumpsum do not because the market is at high at that time so units would have been at a high price and it would have been a trade of loss.
So we need to act accordingly with the market and see it is costly or cheap for our investment in a mutual fund.
How do we know the market is cheap or costly for sip or lumpsum investment.
We all know the fundamentals of buying that always buy at a cheap price and sell at high.
So we use the same concept to find out sip or lumpsum in mutual funds for high returns.
But when do we know when is the market is cheap or costly for investments. To find out the best time to enter the market we need to understand the concept of price to earnings ratio.
P/E ratio.
This ratio means that the price of the company shares to earning per share means that how much the investor has to pay to earn ₹1 of earnings.
So,P/E ratio=Market price of share/earning per share.
We need to apply this concept to the whole nifty 50 indexes and calculate the profit per share.
For example:-
In the mentioned table above the P to E ratio is increasing but the earning per share is remains the same.
This means we have the same earning in increasing the nifty market so the lower p to e ratio will be cheaper and we have to invest for lumpsum at this P/E but can do Sip up to P/E ratio of 25 for better returns.
But in the table mentioned above the even if nifty is increasing the EPS (earning per share) remains the same and at higher nifty the P/E ratio is less which can be seen in the last column of the above example.
So the market is cheap at this point and it does not mean that we should not have to invest in the higher market but also we have to take care of the EPS (earning per share) and P/E ratio.
Which one is the best Sip or Lumpsum in mutual funds?
| P/E ratio | Remains in the economy for a period of | Lumpsum investment | Sip investment |
| Less than 15 | 6 months to 2 Years | Best | Best |
| 15-20 | 1-4 Years | Stay invested and can invest more | Best |
| 20-25 | 6 Months to 2 years | Risk and can invest only 20-30% of your money | Best |
| 25+ | Rare | Stay on cash and do not invest | Best |
From the above table, it simplified that sip is best in all the scenario so you did not have to stop your sip in any of the cases.
But if you have to invest in lumpsum than you should buy a unit in a mutual fund when the market is cheap and low.
As we have discussed earlier also P/E ratio should be your concern about investing and you can invest according to that in the market through lumpsum or sip types of investment.
The key takeaway from the above cases for choosing sip or lumpsum in mutual funds.
- When we need to decide whether the market is cheap or costly it should be only based on benchmark indexes like Bse-Sensex, nifty.
- To calculate that its right time to invest in the market at this point it should be based on the P/E ratio of that index and EPS (earning value per share).
How do we know this Price to earning ratio of the index.
Now, we all know that when we have to invest in sip or lumpsum for good returns and it all depends on the P/E ratio.
But where and how to find out it the P/E ratio and see the records of it.all steps are mentioned below:-
1.Go to the website of NSE India website
2: Go to Products>indices>Historical data>P/E ratio
Use this P/E ratio chart of nse India for historical data.
3: From here you can get the data of the P/E ratio and calculate when is the right time to invest for you as sip vs lump sum.
Why you should choose sip investment in the mutual fund.
Rupee cost averaging.
As sip makes fresh investments every month so it allows you to invest in different types of market conditions.
An investor buys at market’s it’s low or high according to buying of more or fewer units at different nav’s.
So it helps to reduce the cost and average it out over a long period.
No need to watch the market constantly.
Sip also provides the benefit over lumpsum investment is that you need not constantly watch the market.
The investor invests in it according to sip date also it reduces the stress of analyzing the market for future prediction.
One of the key feature is, due to rupee cost averaging almost any time is ideal for investing.
Good for beginners.
Sip allows the benefit of rupee cost averaging so investors need not to time the market.
Therefore, budding investors can start sip with almost no prior investment experience in which all the time is ideal for investing.
Practice of investing.
One of the good advantages of Sip beside rupee cost averaging is that it makes the practice and habit of investing.
So that investors can do recurring monthly sip each month which adds value to each investor’s account.
Things better in lump-sum investment.
Better power of compounding when you choose between sip or lumpsum.
Because it allows investors to buy units at a cheap price and make a handsome amount of money over a long period and fulfills the financial goals in a much easier way.
Multiply capital gains.
Lumpsum investment is ideal for investors who need to multiply their capital gains (generated by the lump sum amount from selling property, profit in business, etc). as it provides good value to the investor in low time if the investor judged the market accurately.
And also to enhance your returns you should know the best investment options around you.
What you can do for better returns from the mutual fund.
Invest for a long duration.
Many of us want to get returns in a lower period and want to get rich but if you want to succeed in investing than you have to invest for the long term like minimum, for the 10-15 years, and get the best returns from this period.
Have Faith in the economy.
Investing needs patience so you should also have faith in the economy in which you are investing.
Whether its Indian economy or international economy gives it time for recovering its losses and it would give better results in upcoming years.
Understand the concept of P/E ratio:-
Though you should invest through sip or lump sum, you need to first have a basic understanding of investing and need to time the market by Calculating the important term i.e P/E ratio.
Start to invest in sip almost all the time as it provides the advantage of rupee cost averaging and should in a lump sum when the market is low and have the potential to rise again.
So, therefore you can better returns from your mutual fund by investing a fixed amount in a lump sum and monthly in sip.
FAQ’s
A-It depends majorly on the market conditions but doing a sip for a long period would give better results due to its rupee cost averaging phenomena as discussed earlier.
and lump-sum would give better returns if you have invested in a minimum P/E ratio in that period.
A-1.Axis Bluechip Fund Growth.
2.Axis Mid Cap Fund Growth.
3.Parag Parikh Long Term Equity Fund Growth.
A-A mutual fund is good to invest can find out by analysis of different criteria mentioned below:-
1. It’s recorded for last at least 10 years or from its inception date as per your risk profile.
2.Record of the fund manager for the past 10-15 years.
3.Asset under the management of that mutual fund.
4 It’s exit load and expense ratio.
A-You have to invest Rs 100,000 through lump sum at a different point in the market
This means investing in different days on the gap of 1 week because it will allocate you the different units at a different time and provide better returns due to fund diversification.
A-Lump-sum investment is to be carried out when the market is low or chances of growth is high in tenure you are targeting.
It provides the advantage over sip because it buys the unit at same price for long period which would give higher return.
This is Randeep pursuing mechanical engineering and passionate about learning new things in life every day who is looking forward to enhancing skills that would help me in building my own empire.
