This article talks about 2 ways of investing your money in mutual funds i.e SIP and Lump-sum. This article also contains a comparative analysis of the 2 methods and helps you decide which one is best suited for you.
Mutual Fund investment is rapidly growing in India. A rising number of people are investing their money in various mutual fund schemes available in the market. Not only do investors have to choose among different mutual fund schemes, but they also have to choose how to invest in mutual funds. An Investor invests in Mutual Funds in two ways: making a one-time investment (Lump-sum) or spreading out their investments over a period of time through a Systematic Investment Plan (SIP). This decision is very crucial for the investors as the mode of investment can make a serious difference in the investors’ investment portfolio.
Understanding SIP & Lumpsum Investment Methods
In general, both SIP and Lump-sum investment methods offer the benefit of wealth creation to the investor through Mutual Funds. The key difference between SIP and lumpsum methods is the frequency of investment. Let us first understand the investment methods individually.
Under the Systematic Investment Plan (SIP), a certain amount of money is periodically invested in mutual funds. The amount, frequency, and mutual fund scheme are fixed by the investor. The frequency of SIP can be daily, weekly, monthly, quarterly, or half-yearly, etc. The minimum amount that an investor can invest in any specific mutual fund scheme is defined and is less than a lump-sum investment. This method is specifically beneficial for people having small but regular amounts of money available for investment purposes.
On the other hand, under the Lump-sum investment method, the investor makes a one-time bulk investment in a particular mutual fund scheme. Under this method, investors do not make periodic investments in the scheme, rather they put their money kept for investment purposes in one go. This method is specifically beneficial for people having relatively high investment amounts and risk tolerance.
What factors should be considered before deciding the right Investment Method?
Investors must consider the following factors before deciding on the right mutual fund investment route for themselves:
- Market Timing: If you have adequate knowledge about the markets and can identify business cycles, then you can base your decision on this factor. During the periods of market low, lump-sum investment generates higher returns as compared to SIP. But during other times, SIP helps you to distribute market risk by investing periodically over different cycles.
- Investable Amount: The amount of money that you have available for investment also can be a factor leading to your decision. In situations where you have a bulk amount at your disposal for investment, you may choose to invest through the lump-sum method as otherwise, you may end up spending the money. On the other hand, if you are a salaried person, having regular small savings, you should opt for investment through SIP.
- Mutual Fund Scheme Type: The type of mutual fund can also play an important part in your decision. Generally, equity funds are more volatile and hence investment through SIP is better suited for such a scheme. Debt funds are not much affected by market trends and volatility, and thus you may opt for lump-sum investment in these types of schemes.
SIP vs. Lump-sum: Why SIP is a better option?
Although the investment method you choose depends on many factors, most investors prefer to make periodic investments in mutual funds due to the benefits offered by SIPs over lump-sum investments:
- Rupee Cost Averaging: SIP helps you to spread your investments over time during both rising as well as falling markets. SIP enables you to reduce your investment and market risk by lowering your average cost of investment. Under lump-sum investment, your money would buy more units during falling markets and fewer units during rising markets, not providing you an opportunity to tide over market fluctuations.
- Power of Compounding: The interest that you earn on your SIP investments is reinvested in the scheme. The compounding effect helps you to generate greater returns.
- Less Stressful: When making lump-sum investments, investors need to know when they are entering the market. During lump-sum investments, investors need to be extra careful about the entry and exit time. However, with SIPs, you do not need to worry too much about your entry point as eventually your investments will be averaged out in the future.
- Lower Investment Required: As mentioned earlier, you require a lesser amount to invest in mutual funds through SIPs as compared to the lump-sum method. Nowadays, through various online platforms, you can even start your SIP investment with an initial capital of Rs. 100 per month, whereas you require at least Rs. 1,000 for lump-sum investments.
- Financial Discipline: Through SIPs, you can ensure that you are saving and investing a minimum amount of money at a regular time interval. SIPs help you to get into the habit of saving frequently.
- Ability to Diversify: You can easily diversify your investment portfolio through SIP, as it only requires a small amount of money as installments. You can invest in a number of different mutual funds through SIP, which also helps you to reduce your overall portfolio risk.
Although SIP emerges as a better option for most investors, some may prefer the lump-sum investment method. The lump-sum route of investment is better suited for people making longer-term investments. The lump-sum method is also more convenient for investors having a large sum of money. Investors should always study and analyze the market closely before making any lump-sum investment.
Your choice between SIP and lump-sum investments should always be based on your personal requirements. You should always consider factors such as your income, investment goal, time horizon, financial stability, and risk tolerance before determining your investment route. SIPs, according to me, have an edge over lump-sum investments as it helps you to tide over market fluctuations and is a good option even for an inexperienced investor as it does not require you to monitor the market regularly. It is always a good idea to enter the market with SIP investments and move to lump-sum investments as you gain confidence and get more comfortable in the financial world.