Lump Sum vs SIP - Which investment mode should you choose
Thinking of investing in a mutual fund? Here are the factors you must consider before choosing between SIP and lump sum investment
There are two ways to invest in a mutual fund scheme - investing via a Systematic Investment Plan (SIP) or through a one-time lump sum investment. Both have their advantages but choosing one depends on your financial goals and what suits you best as an investor. There are many factors that come into play while making a decision on the method of mutual fund investment.
First, it is very essential to make a clear demarcation between both types of mutual funds.
What is the difference between SIP and Lump Sum Investment?
- The main distinction between SIP and Lump Sum Mutual Fund Investment is the frequency of investment. A systematic Investment Plan or SIP is a regular investment of small fixed amounts spread over a period of time. An investor can pump in money periodically through SIP - daily, weekly, monthly, quarterly, semi-annually, and so on in a debt or equity fund scheme. On the other hand, a lump sum investment is a single payment mode of a bulk sum in a particular scheme.
- The minimum amount of investment also varies between the two kinds of investments. One can start investing in a SIP with as little as 500 Rupees per month whereas a lump sum investment needs a much larger amount.
- There are three parameters that need to be considered while choosing the mode of mutual funds: the number of funds to invest, market conditions, and fund type. Let us look into what makes SIP and lump sum investments attractive in their own way.
When to choose the SIP mode of investment?
- Broadly put, if the investor has a small and regular amount of money at his or her disposal, SIP will be a convenient mode to make an investment. For example, if you want to invest some money on a regular basis from your monthly income, SIP would be a wise choice. SIP is thus easy on the pocket and can be started with as little as 500 Rupees per month.
- There is comparatively lower risk in SIP since the investment is spread over a period of time and only a portion of the investment is subject to market volatility vis a vis lump sum investment where a large amount is at risk. Therefore, investors choosing SIP do not have to worry about the rising and falling of the market.
- SIP gives you the benefit of rupee cost averaging which means that the investment is spread over different stages of the market cycle. You can buy more units at a lesser cost when the market is low and increase your chance of earning profits in the long term. When the market is high, fewer units should be brought to cash in the profits at the right time. Therefore, the big financial blunder of buying high and selling low can be avoided in SIPs.
- SIP incorporates the power of compounding where the interest earned on the SIP is reinvested in the scheme. This allows for greater returns over a period of time.
- One of the best features of SIP is that it inculcates financial discipline in an investor. It protects investors from chasing trends and ill-timed purchasing of funds. The amount is deducted from the account and invested by a predetermined date on a regular basis and therefore the investor cannot postpone making an investment.
- Investing in the SIP method is good for beginners as it allows flexibility with the amount invested and lets you build a corpus over time without experiencing a financial burden.
Lump-sum investment is the type of investment that is feasible for seasoned investors who have a good knowledge of the working of the market and have a surplus amount of funds.
The lump-sum mode of investment requires risk tolerance and investing in the most opportune time i.e when the market is growing. In this way, larger returns can be accumulated through lump sum investment by studying the market and taking advantage of market corrections. The lump-sum method is best for educated investors who have a good understanding of the market and can invest for a long period.
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