Mutual fund investments offer excellent flexibility to investors in terms of a variety of asset classes and modes of investments. That being said, you’ll realise that the former isn’t that stimulating if you carefully gauge your financial goals and needs. However, a little overlooked yet equally important aspect is choosing the appropriate mode of investment. There are two distinct ways to invest in mutual funds – SIP or Systematic Investment Plan and Lumpsum. Mind that SIPs and lumpsums are just different ways to invest in mutual funds and not an investment product in itself. So, let’s understand these two investment routes to know which is suited for your needs.
What is SIP?
SIP is an investment vehicle wherein you invest a fixed amount in periodic intervals for a specific period of time in your desire mutual fund schemes. The investment amount, duration, and the periodcity is pre determined before you decide to invest in SIP. The money is automatically deducted from your bank account and used to buy units of the mentioned mutual funds. SIP instils a sense of financial discipline among investors as the inevstments are automatically debited from your bank account.SIP investments also help to average the cost of mutual funds as the units are bought irrespective of the market condition. This mode of investment does not require to time the market.
What is Lumpsum?
Lumpsum investment is another way of investing in mutual funds. Under this method, the investor invests the entire amount in one go. Investors who have a substantial investment amount at disposal might consider investing in mutual funds via lumpsum mode.
SIP investment vs Lumpsum investment
|Cash flow||Regular and periodic||One-time investment|
|Risk profile||Low to moderate||Moderate to high, dependent on the market conditions|
|Time of investment||Subject to your investment goals but somewhat immune to market conditions||Subject to your investment goals and market volatility|
|If you have an uncertain future income||Not recommended||Relatively recommended|
|Flexibility of investment||High||Low|
|Affordability factor||SIPs can be easily afforded by investors as an investor can invest as low as Rs500 per month.||Lumpsum investments require a significant one-time investment which makes it difficult for everyone to adhere to it.|
Choosing a SIP investment or a lump-sum investment should depend on your personal requirements. Factors such as financial stability, income, risk capacity, and investment goals play a significant role to determine the route of your investment. You can also use an SIP calculator or a lumpsum calculator to understand the returns on your investments.
That being said, experts believe that SIPs are superior to lumpsum investments on two counts: they can help you ride the market fluctuations and be a good option even for new investors as they do not require frequent monitoring of financial markets. Happy investing!