Mutual fund investments are accompanied with great flexibility in terms of choices offered to investors. Investors are offered a large variant of mutual fund schemes to choose from. What’s more, they can also choose the preferred mode of investment. That being said, the selection of asset classes won’t be that difficult if one has carefully analysed and assessed their financial goals, investment horizon, and risk profile. However, a slightly overlooked, yet equally important factor is choosing the right mode of investment – SIP (systematic investment plan) or lumpsum. Which investment approach is better? Let’s understand these 2 routes in detail.
What is SIP?
SIP is a financial vehicle to invest in mutual funds. Under the SIP investment, investors invest a fixed amount for a specific period at pre-defined intervals. The investment amount can be as low as Rs 500. The investment amount and the periodicity of the intervals are pre-determined before an investor starts to invest in SIP.
What is lumpsum?
A lumpsum investment is a mode of investment where an investor invests a significant amount of money in a particular mutual fund in one go. Users with a substantial amount of unused cash with a high-risk tolerance usually prefer this mode of investment.
Pros and cons of lumpsum investment
One of the key benefits of investing via lumpsum mode is that they have the potential to offer significantly higher returns on investments, given that you time your investments properly. However, investors often forget that it’s nearly impossible to track the market and time their investments. God forbid, if your timing goes off, you can incur a significant loss, one that can take ages to recover from. You should invest in mutual funds via lumpsum mode only if you have a high-risk profile and you are prepared to wait longer periods to fetch returns. On the plus side, investing for a longer duration via lumpsum means higher returns, owing to thr power of compounding.
Pros and cons of investing in SIP
Sip investments instil financial discipline among investors. They also offer investors the benefit of rupee cost averaging. An investor tends to buy lesser units of mutual funds when the markets are high and vice versa, thus averaging out the purchase cost of mutual fund units. Investing via SIPs help to protect your investments from the volatility in the market in the long run.
SIP vs Lumpsum
|Time of investment||Subject to your investment goals and market volatility||Subject to your investment goals but somewhat immune to market conditions|
|Uncertain future income||Relatively recommended||Not recommended|
|Cost of investment||High (requires a significant one-time investment)||Less (thanks to rupee cost averaging)|
|Flexibility of investment||Low||High|
As an investor, you can use an SIP calculator or a lumpsum calculator to gauage the future value of your investments. Remember, there is no right choice. Choose the one that best suits your portfolio. Happy investing!