Investing comes with a variety of choices. When it comes to investing in mutual funds, the options are endless. But one of the crucial decision’s investors have to make is to choose the mode of investing, i.e. SIP or lumpsum.
Today we will talk about both of these modes of investment. Let’s dive in.
Systematic Investment Plan (SIP)
A Systematic Investment Plan is an investment mode wherein you invest a certain amount periodically, i.e. daily, weekly, monthly, quarterly, etc. When you choose to invest in a mutual fund scheme through SIP, a certain amount will get debited from your linked bank account after each period.
Benefits of investing through the SIP
• You don’t need to study the market cycles carefully; investments go on irrespective of market levels.
• You can avail the benefit of Rupee Cost Averaging.
• You’re able to build and maintain discipline in investment.
• It offers the potential to generate wealth by investing a specific amount regularly.
Lump Sum Investments
A lump sum investment is a mode wherein an investor chooses to make one-time investment in an MF scheme. Here, the investor has to invest manually every time. We know that the NAV of any fund keeps changing on a daily basis. Low NAV helps investors to buy more mutual fund units. Alternatively, higher NAVs get you fewer units for the same amount.
However, it is important to note that the time in the market always plays a bigger role than market timing.
The benefits of the lump sum investment are:
• You can make one-time investments whenever required to reach your financial goals.
• If you stay invested, your entire investment benefit from the power of compounding for a longer period
• You don’t need to make any commitments in terms of investing periodically.
• You have total flexibility when it comes to the investment amount. While the initial investment amount might be Rs 1000 or 5000, depending on the fund type and fund house, you can make additional investments as per your requirement.
Differences between SIP and Lump sum investments
Let us look at some key differences between these two investment options.
• Minimum investment needed
To start a SIP investment, you can even begin with a low investment amount of Rs.500. Moreover, the minimum SIP amount for investment in some funds is as low as Rs.100. Hence, it is easy to start investing in mutual funds through the SIP route.
However, in the case of a lump sum investment, you may need a minimum amount of Rs.1000 to start a lump sum investment.
• Rupee cost averaging
When you invest through SIPs, you can invest during different market cycles without worrying about market levels. As your investment amount is fixed, you can buy a few units when the market is up and more units when the market is down. This evens out the cost of your investment. The concept is known as rupee cost averaging.
However, when making lump sum investments, you can not enjoy the benefit of rupee cost averaging.
• Build disciplined investing habits
Since a certain amount is debited from your account periodically, SIP investments aid you in building good investment habits. You can also increase your SIP amount gradually.
In the case of lump sum investments, you have to make the investments manually. And more often than not, we keep delaying our investments. And, eventually, the money gets spent on some other things.
So, it takes a lot of willpower to make lump sum investments at regular intervals.
Bottom line: Which investment option is better for you?
Whether to choose SIP or Lump sum mode of investments should be dependent on your cash flows. Regular cash flows can allow you to invest in SIPs, while lump sum investments depending on market valuation, may be preferred during irregular income/cash flow periods.
You should consider various factors, such as financial goals, income, risk tolerance, investment amount, etc., before choosing a particular mode of investment.
SIP and lump sum can complement each other and help you achieve your financial goals faster. You can make SIP and lump sum investments in the same fund. For instance, you might have an SIP running in one fund, and you can also make lump sum investments whenever possible.
