# Lumpsum or SIP/STP

[Original Post and discussion](http://redd.it/1q8dwj)

This is quite confusing to many people, since the finance world touts SIP (Dollar Cost Averaging in foreign terms) as the best way to invest.

Definitions:

**SIP (Systematic Investment Plan)** = one invests a fixed amount of money at a regular interval (daily / weekly / monthly / quarterly). In short, it is transfer of money from cash to a particular asset (mutual fund / direct equity called the DIY-SIP or other such names).

**STP (Systematic Transfer Plan)** = one switches from one mutual fund to another at regular interval, if the money is already with the AMC (asset management company).

**Lumpsum** = The investment of the whole lot of money into an asset.

*Basic Guiding Principle:* The overall average return of various asset classes vary. In the long term, the cash and cash-equivalents produce low but fixed returns, while the equity assets produce high returns with volatility (in most cases).

Eg. 1:

You have got 10 lakhs, and your investment horizon is >10 years. So should you put your money in

1. 10L in an equity fund (or equity-oriented hybrid fund) on day 0. OR
2. Put your money in a short-term debt / liquid fund and start a STP into the equity fund at monthly (120 installments) / yearly (10 installments) intervals.
3. Keep your money in your bank account and start SIP into the equity fund at 120 monthly / 10 yearly intervals.

Since the investment horizon is quite long, it is much better if one chooses option 1 (whatever be the sensex levels). Option 3 will give you lesser overall return, because the long term return from the cash component will be quite less than of the diversified equity asset class.

There is one [study](https://investor.vanguard.com/investing/online-trading/invest-lump-sum) released by Vanguard which supports the above.

Eg 2.

You do not have 10L, but can invest at a rate of 8k per month (Total principal amount 10L, over 10 years). So should you, since lumpsum is better than SIP,

1. Start putting your money into your account / liquid fund over all those 10 years, and then invest lumpsum at the end of 10 years, OR
2. You should start putting the money directly into Equity as a regular SIP.

The answer is obviously 2, since you will not be missing out on all those 10 years of equity returns.

TL;DR, if you have money to invest for a long term, put that money into a diversified equity asset ASAP. If you have got lumpsum (eg, bonus money or tax refund), then invest lumpsum. If you have regular stream, then invest at a regular interval.