Whatever investment you make in the market should be on the basis of your financial goals, expenditures, risk profile and also your current income. Depending on how much you can afford, you can choose between investing in the regular SIP and investing a lump sum investment. Let us know more about SIP and lump sum investments in mutual funds.
There are two different ways to invest in mutual funds. One method is the SIP (Systematic Investment Plan), and the other method is to make a one-time annual lump sum payment. Let us discuss more SIP and lump sum investments.
What is the lump sum investment?
Lump sum investment could be best defined as a one-time investment. For example, you invest Rs. 12000 as a one-time investment. If you are having a huge amount of money in hand and have a great risk tolerance, then you should opt for lump sum investments.
What is SIP?
In SIP (Systematic Investment Plan), the same Rs. 12000 will be invested in the form of Rs. 1000 every month. SIP is considered to be the best choice for those people who cannot afford a lump sum investment.
Benefits of SIP over Lump Sum Investments
SIP is considered to be better than a lump sum investment method. Let us discuss a few reasons which make SIP better than lump sum investments.
You do not have to take out time to invest in SIP, and there is no need to watch the market constantly. The investors who are inexperienced and new to the market are very confused about the best time is to invest in the market. If you are investing a huge amount in the market, then there is always a risk that you might lose a major portion of your investment if the market crashes, but there is also a chance that you might get a great benefit if the market is high.
However, if you have invested in a SIP, then the money is spread over time, and only a small part of your investment will be susceptible to the market crash.
Rupee Cost Averaging
A SIP will allow you to invest in the funds at different stages of the market. The fund manager buys a number of units when the market is down and then sells it at high rates when the market reaches its peak. This will help in reducing the buying cost of per-unit. This is known as Rupee Cost Averaging.
Build a habit of investing
Everyone should create a habit of investing because it would help you save some money. Learn how to plan SIP.
The ideal way to start your career in investing
If you have just begun your career, then investing in a SIP is the best way to enter the world of investing. This will help you gain exposure to the markets, with a nominal amount. When you keep on investing in the market, it will help you gain momentum and the knowledge of the market. With time, you can invest in riskier equity schemes, if it suits your needs of investments.
Also read: Understand the compounding benefits of SIP
SIP has proved to be better than lump sum investments in the past years. The returns of SIP for long-term (5+ years) have consistently been higher than lump sum investments.
Power of Compounding is the eighth wonder
Remember learning the concept of Compound Interest in mathematics classes? You might have read just as a subject then, but most people in the money market are benefitting out of it.
Let’s assume that four people invest Rs. 15,000 every month at the interest rate of 15% for 15, 20, 25 and 30 years respectively. The total principal and interest accumulated are:
SIP allows you to increase the investment amount, and you get the advantage of compounding as you earn returns on the returns which are generated by your investment.
SIP is considered to be less stressful than lump sum investments, and it will help you to stay invested. Markets are highly volatile, and it can induce you to withdraw your money in panic when the market is down, in case of lump sum investment. The effect of a market crash is less in terms of SIP because your money is spread over time.
Advantages of lump sum investment
- The amount of investment is huge.
- It is ideal for the long-term.
- There is a convenient one-time payment
Advantages of a SIP
- There is a discipline followed in investment
- The level of risk is reduced
- There is a lot of flexibility for investors
- It is hassle-free
It’s extremely beneficial to start a SIP as soon as possible and be a long term player to get rich. As opposed to a lump sump sum investment, SIP provides the advantage of convenience, inculcating a financial habit, compounding magic, reduced risk etc. Growing rich and taking care of your financial needs is easy with a SIP; start one today.
Latest posts by Mukesh Gupta (see all)
- Mutual Funds: Everything You Wanted to Know About Them - April 22, 2019
- Why SIP is better than lump sum investment in mutual funds? - April 10, 2019
- How should you plan your SIP Mutual Fund Investment? - April 9, 2019