SIP vs lump sum: which is better?

A lump sum is better when you already have the money and the yearly return is a smooth positive number. A SIP is better when the money arrives month by month, or when you do not want one date to set the whole price. Neither is better for every person. The calculators can show the first case. They cannot promise the second.

A SIP is a systematic investment plan. AMFI describes it as a fixed amount going into a mutual fund on a date you choose, usually every month. The fund allots units at that day’s price. The rupees stay fixed. The number of units does not. A lump sum buys all the units on one day.

Finfod’s SIP calculator and CAGR calculator use one yearly rate, compounded. On that path, money that goes in earlier finishes higher. This page runs both engines on the same rate and the same rupees. It does not pick a fund.

The same rupees, two clocks

The SIP page starts at ₹10,000 a month, for 15 years, at 12% a year. Inflation in the projection is 5.5%. The step-up is zero, so the monthly amount stays flat. That 12% is 12% in the site’s equity assumption. It is a planning input. The formula is the one in AMFI’s booklet: each instalment goes in at the start of the month, then earns one month of growth.

Over 15 years you invest ₹18,00,000. The SIP engine’s ending value is ₹50,45,760. The gain before tax is ₹32,45,760. After the 5.5% inflation path, the engine puts the result at ₹22,60,163 in today’s money.

Now give the CAGR engine the same ₹18,00,000 on day one, for the same 15 years, at the same 12%. It finishes at ₹98,52,418. The gain is ₹80,52,418. The lump sum is ahead by ₹48,06,658.

Table: ₹18,00,000 at 12% for 15 years

The gap is not a trick. The lump sum’s last rupee has 15 years of compounding. The SIP’s last rupee has one month. The average rupee in the SIP is invested for about half the period. At any steady rate above zero, the day-one investment wins this particular race.

A one-year version is the same idea, with less drama. ₹10,000 a month for one year invests ₹1,20,000 and ends at ₹1,28,093. The same ₹1,20,000 invested on day one ends at ₹1,34,400. The gap is ₹6,307. People feel this less because both numbers are close to the cash they put in. Over 15 years the same rule is simply more visible.

What a smooth rate hides

The CAGR calculator says so on its own page. The year-by-year path is the smooth compound path. It is not a record of what a fund did in each year. The SIP calculator uses that same single rate, split into months.

A real equity fund does not rise 12% every year. It can fall 20% and then recover, or do the opposite. A lump sum bought the day before a fall spends the recovery just getting back to the start. A SIP that continues through the fall buys more units at the lower price. That is the only honest sense in which a SIP “protects” you. It spreads the purchase dates. It does not stop a loss. If you sell during the fall, both methods can lose money. The SIP may lose less, or more, depending on how many units you had already bought at higher prices.

This page does not invent a crash and then run it through the engines. The engines do not take a different return each year. If you want to see a bad first year, you can run the CAGR calculator twice yourself: a fall, then a recovery, using the value from the first run as the start of the second. Do not expect the SIP page to do that crash for you. It will not.

XIRR is the other number people mix in. CAGR is one start and one end. XIRR is for money that moved on several dates. A real SIP statement usually prints an XIRR. That is the right measure after the fact. The SIP calculator is a projection before the fact. Do not compare a three-month XIRR with this 15-year 12% path. A short stretch, annualised, can look wild.

Tax when you sell

Buying is not the tax event. An equity-fund SIP and an equity-fund lump sum are taxed when you redeem, under the same sections.

Section 2(101) sets the clock at 12 months for a unit of an equity-oriented fund. Held longer than that, the gain is section 198: 12.5% on the long-term equity gain above ₹1,25,000 in the year, if securities transaction tax was paid. Held for 12 months or less, the gain is section 196, at 20%. Cess is 4% of the tax. The engines do not apply your slab, and they do not apply surcharge, because the rest of your income is not on the screen. A debt fund bought on or after 1 April 2023 is taxed at slab rates. This example is an equity fund.

The SIP engine sells every unit in one year. The early units are long-term. The last 12 months of instalments are short-term. On the 15-year SIP above, the long-term gain is ₹32,37,667 and the short-term gain is ₹8,093. The exemption used is ₹1,25,000. Long-term tax is ₹3,89,083. Short-term tax is ₹1,619. Cess is ₹15,628. Total tax is ₹4,06,330. The value after that tax is ₹46,39,430.

The lump sum is one lot, held for the full 15 years, so the whole gain is long-term. The same tax function the SIP page uses, applied to a gain of ₹80,52,418 held longer than 12 months, gives tax of ₹10,30,564 after the ₹1,25,000 exemption and cess. The lump sum’s higher gain produces a higher tax, and it still finishes ahead on this smooth path after that tax: ₹88,21,854 against the SIP’s ₹46,39,430.

The exemption is once a year, for all your long-term equity gains together, not once per SIP and once per lump sum. If you already used it on another sale, both of these bills go up. The capital gains guide is the full set of rules. The capital gains calculator is the place for one sale with dates.

ELSS is a SIP or a lump sum with a lock. Each unit is locked for three years from the day it was allotted. A tax claim, if you are in the old regime, is section 123, and it shares the ₹1.5 lakh cap. The PPF, ELSS and NPS guide is that choice. It is not a reason to prefer a SIP over a lump sum inside ELSS. The lock is on the unit, either way.

When you do not have the lump sum

The table above pretends you are holding ₹18,00,000 on day one and deciding whether to invest it or to drip it. If you have to save that sum out of salary, you do not have it on day one. The alternative to the SIP is not the lump sum. It is leaving the money in the bank until the pile looks large enough.

Those months in the bank earn a deposit rate, and the interest is taxable unless a section says otherwise. They do not earn the equity rate you typed. A person who waits four years to invest ₹18,00,000 has skipped four years of the return they were hoping for, and still faces the one-day price risk when they finally invest.

A step-up SIP, where the monthly amount rises each year as salary rises, is the version that matches a career. The SIP calculator has that box. This page left it at zero so the lump sum of the same total cash would be an honest comparison. Turn the step-up on when you are planning your own salary. Do not compare a rising SIP with a lump sum of only the first year’s cash.

There is also the money you may need sooner than 15 years. Equity is a poor place for next year’s fees or an emergency. A SIP does not make a short goal safe. The holding period for the tax rate is a tax fact. It is not a statement that one year in shares is a comfortable risk.

How to use the two calculators

Type the monthly amount you can actually spare into the SIP calculator. Change the 12% if you think it is too kind or too harsh. Read the ending value, the inflation-adjusted value, and the tax line. The tax line assumes you sell everything in one year.

If a bonus or a maturity has already landed, type that amount into the CAGR calculator as a future value at the same rate and the same years. Compare that with investing it as a SIP only if you are willing to hold the cash back on purpose. On a rising smooth path, holding it back costs the gap this page just calculated.

If the money is for a goal inside three or four years, do not use either equity path as the plan. The calculators will still give you a number. The number is not a reason to put next year’s expense into shares.

Nothing on this page says a SIP is a product you should buy, or that a lump sum is braver. The engines say one mechanical thing. At one positive yearly rate, rupees that are invested sooner grow more. Your salary, your need for the money, and a market that does not move in a straight line decide which instruction you can follow.