Systematic investment plan or SIP is a facility that is available with most mutual fund schemes. This is not a separate product but it allows you to invest regularly in a scheme by fixing a periodic contribution.
Say you want to invest Rs 3 lakhs over the next one year. Instead of trying to accumulate that much worth of savings and then investing in a mutual fund scheme, you can simply break this up into smaller portions of say Rs 25,000 through a monthly SIP and reach your target investment amount for the year.
SIP and lump sum investing are both worthy ways to set up your investment account. It doesn’t have to be one or the other.
SIP is more about a disciplined approach to investing and has a place in everyone’s investment strategy.
SIP lets you plan better
Investing through SIPs helps you plan your investments and manage your monthly fund flow better. You start an SIP for as many months or years you choose and let the automated system do the rest. Your monthly spends and other investments can then be worked around this regular investment.
SIP also helps you cut through market volatility by continuing your investment cycle when the market goes down or up, benefitting from both. SIP is more about a disciplined approach to investing and has a place in everyone’s investment strategy.
Lumpsum returns will always look better in the long run
In a developing economy like India, the estimated growth in the long term continues to be positive and greater than many other developed economies. In such a scenario the equity market returns in the long term are likely to follow a similar trajectory as economic growth.
If this assumption holds true, you will see that the equity market returns keep growing from one decade to another. As a result, the returns from a lump sum investment started a decade ago will tend to look better than SIP returns (started at the same time) given that your SIP investment continued through market peaks too.
However, it is perhaps incorrect to compare the two in terms of returns. What you should focus on is the discipline of investing. On one hand, SIP lets you cut through the noise and invest regularly. On the other hand whenever you have lump sum amounts, you should look at investing those as well. Both strategies work in the long run. The answer is not this or that, rather it’s a combination of the two.