In life, you are often presented with two choices in front of you. It can range from something as simple as: should I take the right turn or the left turn. Sometimes, it can be more complicated like: should I continue with my current job or start my own company. You may not always know which option to choose. But with ample information and the pros and cons of each choice, making your decision gets easier.
Same is the case with mutual fund investments. Lots of investors are not sure whether to invest through Systematic Investment Plans (SIPs) or in one go. In this article, you can find out which option works best for you.
What is SIP investment?
Systematic Investment Plan or SIP is a method of investing in mutual funds. Here, you invest a fixed amount of money in a fund on a regular basis. This could be monthly, quarterly or a semi-annual basis.
What is lumpsum investment?
In a lumpsum strategy, you invest a large sum of money in mutual funds at one go. For instance, if you have an amount of Rs 5 lakh and you invest it all in one go in a mutual fund, this would be a lumpsum investment.
Advantages of SIP
1) Ideal for beginners
SIP involves investing a fixed amount of money in a fund at regular intervals. So, if you are a novice investor and you wish to gain exposure to the market, this is the best way to do it. This is because you can invest even small amounts (as little as Rs 500) in a fund each month. And as your income grows, you can consider increasing your investment amounts.
2) Rupee cost averaging
When you invest steadily in a fund each month, you don’t have to worry about timing the market. When the market is high, you buy lower number of units and when the market is low, you buy a larger number of units. This is known as rupee cost averaging. By investing for a longer period of time, you can earn high returns without strategies like market timing.
3) Investment discipline
In an SIP mutual fund, you have to invest money on a regular basis. This offers you the opportunity to inculcate investment discipline. And the best part is, you can directly give a standing instruction to transfer a fixed amount of money from your bank account to the fund. As a result, you can watch your funds grow right in front of your eyes.
Advantage of lump sum investment
1) Ideal for large sums
As the name suggests, this method is ideal for large sums of money. So, in case you have large amounts of money, it is better to invest in a lump sum instead of letting it lie idle. Businessmen, for example, generally have an irregular cash cycle. For these people, it may be better to invest in lumpsum instead of SIPs.
When you make a lump sum investment, you only do it once or twice a year. As a result, you don’t have to worry about meeting future payments on a regular basis.
3) Potential for high returns
One of the biggest advantages of lump sum investments is that you have the potential to earn high returns. For instance, when you invest large sums of money when the market is low, you have the potential to earn high returns when the market rises again. However, this is only possible if you are able to correctly time the market. That’s why, this method is more suitable for more experienced investors who have the ability to stomach market volatility.
Conclusion: Which is better?
Now, which is better: SIPs or lumpsum? Well, that depends. Both of these options are good. However, based on factors like investment amount and experience, you need to decide which type of investment is more suitable for you. You can also use a strategy to use a combination of both SIP and lump sum to maximise your returns.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.