SIP vs Annual Investing: Which Works Better and Why?

As an investor, you may be looking to build long-term wealth. That’s a dream for most investors, nevertheless. However, the way they choose to build this financial resilience can look very different.

While some investors prefer a methodical approach with monthly SIPs, others prefer making a single, large investment once a year. Beginners often find these options confusing, particularly while evaluating the approach that delivers better returns.

In reality, you can go with any of these approaches, considering your income flow, discipline, and the market conditions. In this blog, we have comprehensively discussed how each method works. Read on to know the strengths of these approaches and find the one that fits your financial behaviour.

How Monthly Investing in SIP Works

An SIP is one of the easiest and most consistent ways to build long-term wealth. You simply need to keep investing a fixed amount every month. The process is automated, and you need not worry about timing the market.

SIP contributions benefit investors through rupee-cost averaging. This implies you buy more units in bear markets and fewer when prices rise. The automation also eliminates the risk of emotional decision-making.

Salaried professionals usually prefer SIPs since they have a predictable income. With long-term compounding, even small monthly contributions can help you build substantial wealth. Use an SIP calculator to get a clear visualisation of the growth and the estimated corpus size.

How Annual Investing Works

When you invest annually, you put in a larger contribution once a year, instead of spreading it across the months. This is a popular option among business owners and freelancers, or those who receive yearly bonuses.

With proper timing, annual investing can help you capitalise on big dips. However, timing the market can be challenging, as many investors end up waiting too long to reach the bottom of the market and lose months of compounding.

You can use a yearly SIP calculator to compare how annual contributions can help you build wealth over time.

SIP vs Annual Investing Performance Comparison

Now, let’s see how SIPs stack up against annual investments in different market conditions.

1.     Volatile or Sideways Market

When markets remain volatile or move sideways, SIPs usually deliver better outcomes. The rupee-cost averaging helps in smoothing out these fluctuations.

However, with annual investments, you stand the risk of putting in a large amount potentially before a downturn. So, with SIPs, you enjoy a gentler and more resilient path in unpredictable phases.

2.     Strong Bull Market

Annual investments are sizable, so they tend to outperform SIPs in clear bull markets. Your entire investment gets exposure to the rally. On the contrary, contributions with monthly SIPs are gradually exposed to bull runs.

3.     Bear Markets or Deep Corrections

If you notice a sharp correction, annual contributions can fetch you better returns, provided you time your investment correctly. These opportunities often lead to strong long-term returns when markets recover.

Meanwhile, SIPs help you stay invested without panic through these corrections.

Which Method Helps You Stay Consistent?

Consistency is the key to success when it comes to wealth creation. Ultimately, it’s your cash flow that determines the ideal strategy for you.

Young investors and salaried professionals often automate their contributions from their monthly income, creating SIPs.

However, those with irregular income or with a deeper understanding of market cycles may wait for an ideal entry point, opting for annual investments.

Here’s how your returns compare if we take a look at similar contributions through SIPs and annual investments over the same period.

Scenario 1

You invest INR 5,000 in a monthly SIP for 10 years (yearly contribution adds up to INR 60,000), where your total investment comes to INR 6 lakhs. Considering an annual interest rate of 12%, your portfolio grows to INR 11.61 lakhs.

Scenario 2

You choose to invest INR 60,000 a year for 10 years in the same fund. Your total investment adds up to INR 6 lakhs, considering an annual rate of 12%. In this case, you accumulate a wealth of INR 11.79 lakhs, which is slightly higher than what your SIP contributions would return.

A Balanced Strategy – Best of Both Worlds

By now, you know how each strategy works. Many investors choose to go with a combination of monthly SIPs and an annual investment. 

For instance, you contribute to your monthly SIPs from your salary, while you put a part of your bonus or excess savings in an annual SIP when markets correct. 

With this hybrid model, you can balance consistency with opportunity. It’s an effective pathway to capture growth throughout market cycles.

Conclusion

Investors can build long-term wealth both through SIPs and annual investments. Before you make up your mind, consider whether you can regularly contribute to monthly SIPs or would find annual investments more comfortable.

Patience and consistency are key, while compounding does the rest. As the best strategy, consider balancing your approach through both SIPs and annual investments.