Investing in a Mutual Fund gives you access to a pool of stocks in one go, or you can pick individual stocks to build your portfolio. If the fund is doing well, you can keep putting money into it to increase your exposure to its investments. It is then actively, or sometimes passively, managed by the fund managers and tries to give you the best returns possible.

When investing in a Mutual Fund, you can opt for either a Systematic Investment Plan (SIP) or large lump-sum payment. With an SIP, you regularly invest a fixed amount on a specified date and it is suitable for those with limited income. On the other hand, a lump-sum investment can be useful when the market momentarily drops, making the fund cheaper to buy. Both of these methods are valid investing choices but many professionals suggest that salaried people go for an SIP approach as they don’t have to actively monitor their investments. Consequently, it raises the question of whether SIPs outperform lump sums over time. Let’s consider this further.

The underlying premise is that no form of investment, be it an SIP investment or lump sum investment, is objectively better, and the returns you get are always dependent on your investing prowess. In some cases, an SIP investment can outperform lump sum payments over time, while in others, lump sum payments might win. Let’s examine two scenarios.

A situation might arise when the price of the mutual fund falls over time. This could be an advantage if you invest through an SIP, as you will buy a lower and lower number of units with each payment. When the Mutual Fund goes up again in value, your returns will be higher than with a lump sum payment because you have bought more units at a lower price. If investing with a lump sum, you’d have to manually buy additional units during the dip if you want to benefit from its rise later on. You would then have to try and spot a good entry point in order for your returns to be maximized.

In another scenario however, if the price of the fund appreciates over the long run rather consistently without any sustained dips etc, then your lump sum investment might gain an advantage over the SIP investment method, because you will benefit from the simple premise of buying low and selling high. You are investing smaller amounts over time with SIP investments, so you are also buying the stock at regular rises, which could diminish returns over time.