SIP v/s Lump-sum Investment for Self-employed People

SIP v/s Lump-sum Investment for Self-employed People

Self-employment comes with its own set of pros and cons. Pros include work style, system, and schedule flexibility. However, self-employment does not always guarantee regular monthly income flow, as can be experienced by salaried employees. Moreover, there exist no provisions like company insurance or EPF. Therefore, being self-employed requires a sound financial status and an expert investment plan to ensure a strong financial portfolio. 


Some of the best investment options for self-employed people in India include 

  • Mutual funds,
  • Insurance,
  • ULIP,
  • NPS and
  • PPF.

Factors to consider before investing:

Some of the important factors that a self-employed individual must consider before investing include:

  • Purpose of investment:
    You must possess a clear objective and plan for reaching your financial target. Every financial instrument is not equally suitable for every investor. Also, you need to understand your ideal asset allocation in line with your financial goals and then to depend on your financial goals, change in asset allocation and your risk profile along with your investment horizon, you need to choose your fund for investment accordingly.

  • Investment horizon:
    The investment horizon is a crucial determinant while designing your investment portfolio. It depends on the targets you have set depending on the time frame, like for long-term or short-term, and so on. NPS, equity mutual funds, and PPF are ideal for long-term investments, while debt mutual funds are a perfect suit for short-term goals.

  • Risk:
    Every type of asset comes with a certain amount of risk. Equities and other equity-related instruments are highly volatile, while some debt investments are government-backed, making these schemes less risky. In fact, the overall risk level of a debt portfolio is less than that of an equity portfolio. Thus, depending on your risk tolerance level, you must proceed with your investments.

  • Return:
    Every investment type comes with a unique rate of return. Depending on your requirements, horizon, and past performance of the chosen investment type, choose your portfolio.

  • Costs:
    Almost every type of investment comes with certain costs and expenses. Mutual funds come with exit load, expense ratio, and fund management fees; stocks come with transaction fees, etc. Clarify these issues well beforehand.

  • Liquidity:
    While choosing an asset, liquidity is one of the considerable basic factors. This is essential as you must possess easy access to your funds in case of unprecedented financial contingencies. Mutual funds offer high liquidity.

  • Lock-in period:
    Certain types of investments come with a lock-in period, i.e., the holding period of an investment. ELSS mutual funds come with a standard lock-in of 3 years as they are eligible for a tax benefit under section 80C.

  • Taxation:
    All mutual fund investments are subject to LTCG and STCG, while PPF investments are tax-free. Be aware of the tax obligations to avoid any misunderstanding or loss. 

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Mutual fund investments:

In this article, we will highlight the prospects of lump sum mutual fund investments as SIP of a self-employed individual. It can be broadly classified into two categories: lump sum and SIP. Even before you make the actual investment, you can easily avail yourself of the benefits of the SIP calculator and lump-sum calculator to know the estimated future results of your MF investments. An online SIP calculator and lump-sum calculator work automatically as you correctly enter all relevant details.

SIP investment:

SIP or Systematic Investment Plan is like a recurring deposit that requires the investor to make a regular investment of a fixed amount at regular intervals to an MF scheme of your choice. This makes your investment spread over a certain tenure. You do not require any huge funds to begin. Depending on the type of fund, you can even start it with INR 100. 

Lump-sum investment:

As the name suggests a lump-sum investment allows the investors to deposit the entire fund in a single shot to acquire the desired number of MF units. When the fund’s NAV remains low, a lump-sum investment is beneficial. 

A comparative study of SIP and lump-sum MF investment

NEED FOR MARKET MONITORING SIP requires constant market monitoring as the investment is supposed to span through variable market cycles This is usually a long-term investment as does not require close market monitoring regularly
FLEXIBILITY Comparatively far more flexible than lump-sum opportunities Lack flexibility
MARKET VOLATILITY RESPONSE Minimal market volatility Extremely responsive to market volatility
FINANCIAL DISCIPLINE INCULCATION Requires regular investment in a planned schedule, thus inculcating a disciplined financial strategy This is a one-shot investment and does not inculcate much financial discipline

Benefits of SIP

Most present-day investors prefer SIP because of these highlighting benefits:

  1. Market condition:
    As SIP investment spans through various market cycles, no close market watch is essential while entering.

  2. Rupee-cost averaging:
    As SIP leads to fund purchase through several market cycles, the per unit cost gets automatically averaged out in the entire investment horizon. A low market implies more unit purchases and vice versa.

  3. Investment amount:
    SIP investment can be started with as low as INR 100. Using a SIP calculator you can decide upon the issue.

  4. Power of compounding:
    The interest earned through SIP gets reinvested in the same instrument or fund as chosen, generating higher returns.

  5. Disciplined investment:
    Regular investment inculcates the habit of savings thus ensuring financial discipline.

Benefits of lump-sum investment:

The lump-sum investment is beneficial during market lows, ensuring more unit purchases. Therefore, monitoring the market before entering is essential. However, regular market monitoring is not required once the investment is made.
It is ideal for the long term, but you cannot avail of the rupee-cost-averaging benefit here. You can use an online lump sum calculator to know the prospects of your investment. 

What to choose?

Usually, a self-employed person does not have a regular income. This is when he can opt for lumpsum investment as and when he has an investible surplus. However, if he is keen to take the advantage of rupee cost averaging, then he can choose to do SIPs, and then step it up with spurts of lumpsum investment with additional surpluses from time to time!

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