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You can invest in a mutual fund scheme in 2 ways – either by investing a lump sum amount or via a systematic investment plan (SIP). While the lump sum route is a single payment mode, under the SIP mode of investing, a fixed amount is invested at fixed intervals of time which can be daily, monthly, quarterly or semi-annually in the mutual fund scheme of your choice.
Lump Sum or SIP – Which Will Give You Better Returns?
The answer to this question depends on the stock market conditions. During upward trends, the lump sum mode of mutual fund investment tends to give relatively higher returns whereas during falling markets, investments made via a SIP generally provides better returns than a lump sum investment.
Let’s understand about lump sum investment in mutual fund with the help of an example.
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Investments Made During Rising Market
If you would have made a lump sum investment of Rs. 12 lakh in ICICI Prudential Equity & Debt Fund during rising markets over say, from October 1, 2013 to September 1, 2014, and a monthly SIP of Rs. 1,00,000 in the same fund during the same period, the lump sum investment would have given you better returns.
| Investment Mode | Amount Invested | CAGR | Time Period | Return |
| Lump Sum | Rs. 12,00,000 | 52.58% | 12 Months | Rs. 17,68,466 |
| SIP | Rs. (1,00,000*12) | 57.88% | 12 Months | Rs. 14,91,883 |
Investments Made During Declining Market
If you would have made a lump sum investment of Rs. 12 lakh in ICICI Prudential Equity & Debt Fund during falling markets say, over say February 1, 2015 to January 1, 2016, and a monthly SIP of Rs. 1,00,000 in the same fund during the same period, the SIP investment would have given you better returns.
| Investment Mode | Amount Invested | CAGR | Time Period | Return |
| Lump Sum | Rs. 12,00,000 | -0.73% | 12 Months | Rs. 11,91,999 |
| SIP | Rs. (1,00,000*12) | 0.58% | 12 Months | Rs. 12,03,204 |
(All the above data is as per the applicable rates of return. Source: Shah Financial Services)
Advantages of SIP Over Lump Sum Investment
- Rupee-Cost Averaging: A SIP helps spread over time during both rising and falling markets. Whereas with a lump sum investment, your money would buy fewer units of the mutual fund when markets are up and more units when they are down. Thus, a SIP enables you to lower the average cost of your investment and reduce the risk of your investment. This is known as rupee-cost averaging.
- Power of Compounding: A SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is known as power of compounding.
- Less Stressful: A SIP investment is less stressful than a lump sum investment and may help you stay invested. Markets can be highly volatile and can induce you to withdraw your money in a panic, if you have made a lump sum investment. This effect is less intense when you make an investment via a SIP because your money is spread out over time.
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10 Best SIP Investments for FY 2020-21
| Fund Name | 1 Year Returns | 3 Year Returns | 5 Year Returns |
| Axis Long Term Equity Fund | 17.62% | 17.74% | 12.72% |
| DSP Tax Saver | 16.55% | 13.53% | 11.83% |
| DSP Equity Opportunities Fund | 15.24% | 12.88% | 11.07% |
| ICICI Prudential Bluechip Fund | 9.8% | 12.43% | 9.75 |
| Franklin India Equity Fund | 5.95% | 9.67% | 8.76% |
| HDFC Equity Fund | 9.61% | 12.47% | 8.07% |
| ICICI Prudential Value Discovery Fund | 0.15% | 7.06% | 7.28% |
| Aditya Birla Sun Life Pure Value Fund | -8.59% | 3.52% | 6.14% |
| Nippon India Tax Saver (ELSS) Fund | 3.67% | 4.01% | 5.16% |
| Motilal Oswal Long Term Equity Fund | 15.9% | 15.63% | – |
*3 year/5 year returns are annualised. Data based on the NAV of the direct-growth variant of schemes as on Nov 21, 2019.
10 Best Lump Sum Investments for FY 2020-21
Here is a list of best mutual fund for lump sum investment you can invest in:
| Fund Name | NAV | 1Y Return | 3Y Return | 5Y Return |
| Kotak Emerging Equity Scheme – Direct Growth | 42.74 | 10.73% | 11.78% | 12.60% |
| L&T Emerging Businesses Fund – Direct Growth | 23.59 | -6.61% | 10.25% | 11.84% |
| Reliance Small Cap Fund – Direct Growth | 40.86 | -3.11% | 9.73% | 11.81% |
| L&T Midcap Fund – Direct Growth | 138.1 | 0.49% | 11.22% | 11.71% |
| SBI Bluechip Fund – Direct Growth | 43.81 | 13.74% | 12.54% | 10.75% |
| Motilal Oswal Midcap 30 Fund – Direct Growth | 28.55 | 15.33% | 9.14% | 11.30% |
| Essel Large Cap Equity Fund – Direct Growth | 26.2 | 13.29% | 13.46% | 10.60% |
| Indiabulls Blue Chip Fund – Direct Growth | 22.18 | -4.40% | 9.42% | 10.38% |
| ICICI Prudential Bluechip Fund – Direct Growth | 46.05 | 9.80% | 12.43% | 9.75% |
| JM Core 11 Fund – Direct Growth | 8.34 | -11.61% | 6.21% | 9.43% |
| Aditya Birla Sun Life Small Cap Fund – Direct Growth | 32.13 | -10.08% | 2.50% | 7.66% |
