A lump sum amount is defined as a single complete sum of money. A lump sum investment is of the entire amount at one go.
For example : if an investor is willing to invest the entire amount available with him in a mutual fund, it will refer to as lump sum mutual fund investment.
Lump sum investment is considered as one way of investing into mutual funds. The other method being that of systematic investment plan, popularly known as SIP. Usually lump sum investments are undertaken by big players and investors, in stocks especially those related to assets that are likely to appreciate in the long term, making the investment profitable except in cases of high volatility.
SIP or Systemic Investment Plans are completely the reverse of lump sum investments. The following points will help in assessing the differences between lump sum and SIP.
Mode of investment
Primarily there are two modes or ways to invest money in a mutual fund- via systematic investing plan (SIP) or via Lumpsum .In case of SIP, the investment is done in installments. The whole amount is not investment at once as they follow a systematic way of investments which involves monthly deposits of a fixed sum by the investor.
On the other hand, lump sum investment comprises of a large sum of money invested at a single point. This does not take into account any breakage of the available amount or instalments.
SIPs are quite safe as an investment instrument. Therefore, it is best mainly for the beginners, who have not yet studied the market or are not fully aware of the same.In contrast, a lump sum investment is usually preferable for the bigger players. They have been in the field for a longer time and have gained enough experience about the market. Therefore, they can also handle the risks involved with investing a large amount.
Time period of investment
SIP offers various schemes of investment to the investors. Therefore, the time period of those schemes is also different. They can be both open-ended and close ended or even hybrid.
However, in the case of lump sum payment, the amount is locked in for a particular period of time. Since, there is no need of installments, the amount is paid or deposited only once and is hence, fixed.
Both the investment plans differ greatly in terms of investment approach as well as the risk appetite.
However, lump sum investment has an upper hand when it comes to certain advantages over SIP. The following points showcase the benefits of investing through the former.
Lumpsum investments are more convenient as compared to SIPs, because in the former case, you invest once and watch your investment grow, whereas for the latter case, you will be required to make timely payments.
Moreover, it creates a psychological cycle of repeated checking for profits in case you have invested through SIP. However, you can sit back after investing in lumpsum.
As the lump sum investments are made for one time, therefore, they incur rare minimum charges as compared to periodical investments. These have lower transaction costs as well as lower maintenance costs.
On the other hand, the SIPs have exit load along with taxation liabilities, which is absent in lump sum investments. Hence, one can experience the privilege of investing a large amount at one go.
Appreciation of capital
As already mentioned, lumpsum investments are meant for longer duration, they have enough time to grow in the market. Simply put, the wealth involved in the lumpsum investment gets appreciated in the long run.
Additionally, the lump sum investment also has the time to adjust to the market changes too. As a result, it will be capable enough to significantly grow.