Investing in Mutual Funds: SIP vs Lumpsum

Investing in Mutual Funds: SIP vs Lumpsum

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.

2) Convenience
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.


How to select the right mutual fund scheme

Mutual funds are a great way to invest your money and earn good returns in the future. But at the same time, you also know that mutual funds are subject to market risks. It is possible to lose money when you invest in mutual funds. Every advertisement on TV regarding mutual fund performance mentions this. So, how can you select the right mutual funds for your portfolio to achieve investment success?Well, let’s find out some of the factors you need to keep in mind before selecting a mutual fund1) Fund performanceImagine you have a long-term financial goal like buying a house. You know that you want to invest in equity funds. You may be interested in a particular fund. But is that the right choice for you? One of the first steps is to look at the mutual fund performance ranking. Look at the past reports of the fund to get a better idea of its performance. However, don’t look only at the recent performance. You need to analyse the fund’s performance over a significant period -so that you have adequate information to aid in decision making. This activity helps you get a snapshot of its past performance but it is important to remember that best mutual fund scheme performance is not the sole criterion to select a fund. 2) Experience level of the fund managerThe fund manager’s role is to ensure a mutual fund meets its financial goals at the right time. And to achieve this goal, a fund manager has to move funds accordingly, between different investing instruments. The fund manager has a very important role in the overall performance of the fund. So, as the investor, you need to take a look at the fund manager’s experience and past performance. You can also take a look at some of the other funds under his control. See how these funds have performed to get a better idea of the best mutual fund scheme to invest. 3) Expense ratioExpense ratio is the annual fee that is charged on mutual funds. This fee can vary between different kinds of funds. This depends on various factors such as the size of the fund and the category of investment. In addition, the investment strategy can also determine the expense ratio of a fund. For example, passive index funds which require limited investment strategy have lower expense ratios. Expense ratio is an important factor to look at because it can have an impact on your profits. Higher the expense ratio, lower will be your returns. 4) Exit loadExit load is a fee that is collected by the fund house when an investor leaves the mutual fund scheme. This cost is generally deducted as a fraction of your Net Asset Value (NAV). Compare different fund houses and identify which of them offer lower exit loads. This can help you retain a significant portion of your earnings at the time you leave the fund.The last wordThere are thousands of mutual funds in the market. Identifying the right fund for your portfolio is an important task in order to select the best mutual fund scheme for sip. By looking at the above factors, you can select any or a number of the best 10 mutual fund scheme that can help you maximize your returns in the long run.A number of useful resources are available that can help you to choose the right mutual fund. If you need in-depth guidance and assistance in selecting the right fund according to your risk appetite, you can opt for the expert services of a financial advisor. It is crucial to be restrained, reasonable and stay away from being influenced by short-term price fluctuations in the market. At the end of the day, it is essential to remember your financial objectives and the ultimate goal to build wealth in the end.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Mistakes to avoid while investing in debt

Remember the first time you tried to swim? You probably swung your arms and legs in every direction trying to stay afloat in the water. But when the coach came and corrected your mistakes, you started swimming better. It is always easy to perform a task in a better way once you know the mistakes that you’d naturally make. This way, you can avoid the mistakes altogether and concentrate on the task. Same is the case with investments such as debt instruments. In this article, let’s explore some of the common mistakes to avoid while investing in debt instruments. 1) Investing in low-quality bondsDon’t invest in bonds that have a low credit quality. Each and every bond in the market is given a grade to indicate its credit quality. Independent rating services offer these ratings on bonds. Bonds with a rating of AAA (or Aaa) are investment grade bonds and are considered to be of the highest quality. In comparison, bonds with a rating of B or C are considered to be junk bonds. Such bonds offer a higher rate of interest in order to attract investors. Avoid bonds as a debt investment if you are interested in stable and consistent returns. 2) Ignoring inflationDebt instruments like bonds offer stable returns and reduce volatility in your portfolio. However, in the long term, the returns may not be very high. This can be a big problem when inflation comes into the equation. For instance, imagine you buy a 15-year bond that offers 5% fixed coupon rate. Since the returns remain constant, your purchasing power may in fact come down over the years due to inflation. Keeping this in mind, it is a good idea to expand your horizon and incorporate investments that offer higher returns to your portfolio. 3) Investment-goal mismatchIdentify your investment goals and invest accordingly such as in short term debt instruments. It sounds simple but surprisingly, many investors make mistakes in this aspect. For example, the common goal of people nearing retirement is to earn a little income in addition to capital protection. Here, the priority is capital security. In this scenario, investing in emerging market debt or a junk bond may not be the right decision. Instead look for a bond (government bonds, for example) that offers low volatility and capital safety. 4) Selling bonds when interest rates riseBond prices have an inverse relationship with interest rates. That means, when interest rates rise up, bond prices go down and vice versa. As a result, the price of a bond can vary subject to the change in interest rates. Many fixed income investors tend to dispose their investments based on these fluctuations. However, this is not the right option. It is best to hold your securitised debt instruments until the maturity date. This is because of the simple fact that you could end up with a loss in case you sell your bond and the interest rates move in the opposite direction.To sum upDebt instruments are known to offer stable returns and safety of capital (not to forget peace of mind). However, it is important to avoid the above mistakes investing in debt so that you can achieve the best returns possible on your investments.A number of investors have learnt that it is wise to invest steadily in the market. However, only a few of them track their investment performance on a regular basis. An appropriate review of your debt funds' performance can assure you stay aligned with your investment objectives. It is a good idea to comb out the funds that are not offering returns as good as their counterparts. However, a crucial point is that investors must provide sizeable amount of time to grow their debt instruments. In theory, a time frame a year and upwards must be given to a debt investment to obtain decent yields.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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