Mutual Funds have become an incredibly popular investment option for investors these days. These funds allow the investors to diversify their portfolio and spread out the risk, but choosing the right kind of investment is also crucial. Mutual fund investors are usually confused as to which method to opt for while investing.
Mutual funds provide you an option to invest the amount in one go or place a fixed amount at a regular interval, say monthly, just like bank deposits have two options: fixed deposit and recurring deposit. The first one is a "lump sum" investment, and the second is "Systematic Investment Plan," or SIP.
Both SIP and lump-sum investments allow investors to benefit from potential wealth creation through mutual funds, the primary difference between the two is the frequency of investment.
Benefits of investing in a lump sum over SIP -
In a case where an investor has surplus funds, he may opt for Lump sum investment. It could assist in achieving particular monetary objectives, such as investing in a child's education fund or a retirement fund. Lump sum investment comes with a higher degree of risk since it involves substantial outflow of funds.
Better results in a bull market: When the markets are bullish, you can take advantage of such situation and invest a lump sum amount in the well-performing sector funds. You get the benefit of the upward price movement on the entire amount invested. If you invest when the markets are already at a peak, it might result in losses.
Benefits of Power of Compounding: When you invest a hefty sum and the sum remains invested for a long period, you are able to comprehend the power of compounding.
Benefits of the SIP (Systematic Investment Plan) over the lump sum method of investment:
For investors who are just beginning their investment journey can opt for SIPs. Investing via SIP requires you to set aside a sum at regular intervals, which instils a sense of financial discipline in the long run. SIPs protect you from sharp losses, while giving you convenience to start your investments with as low as Rs. 500 per month.
Rupee Cost Averaging
SIP investment is highly suitable as it allows the investors to benefit from the rupee cost-averaging process.
Investors who invest wisely can easily diversify their portfolio by purchasing more shares at a lower price when the market has fallen, rather than putting all their money in one. Likewise, investors will buy fewer units when the stock markets start rising. It will help in reducing the per-unit cost of purchasing the units. This phenomenon is known as rupee cost averaging.
Affordable
SIP is affordable for all kinds of investors as investments as low as Rs. 500 per month can also be made for some mutual funds. This could bring financial discipline into the life of an investor and also inculcate monthly savings habits.
Portfolio Diversification
Investing in multiple SIPs for a significant period makes a diverse investment portfolio leading to better and higher returns in the long-term period.
Ideal for New Investors
Minimum monthly investment amounts, tax saving under Section 80C, better returns, etc. makes a SIP investment an ideal investment option for both new investors as well as market experts.
Points to consider while comparing SIP and investing in a Lump sum
Risk Factor
Analyzing your risk appetite is the most important factor to choose between SIP & Lump sum.
So, the investor needs to know which method suits their finances the best. Lump sum investments involve a greater risk as compared to SIP, since there is a substantial capital outflow.
Returns
Returns in both lump sum, as well as SIP, depends upon the market conditions at the time of withdrawal.
Lock-in Period
SIP comes with a minimum 3-year lock-in period whereas Lump Sum investments are unlocked altogether after 3 years.
Conclusion
Choosing any kind of investment is completely an investor’s decision based on their risk appetite, investment goals, and income. Any kind of investment requires scrutinizing the mutual fund, their return performance, etc., thoroughly before investing.
Investors who are able to gauge the market's pulse should go with lump sum investments because they would be able to fetch higher profits than SIP investments. SIP is a better solution for individuals without a huge corpus or little market expertise, and it will help instill discipline.
