Which is better and when to choose what?
We all have been hearing this question for a long time now. It isn’t easy to pick one. Each one has its own benefits. The main difference between SIP and lump sum mutual fund is the cash flows. One invests only once in a lump sum investment and in SIP he/she invests regularly. There is no rule that a person investing through SIP can’t do a lump sum when there are surplus funds available.
It is always advisable to invest through SIP as it inculcates financial discipline. But then there are debt funds where SIP is not suitable. Sounds confusing right? Well, it isn’t. Read on know when is SIP investing recommended and when lumpsum is recommended i.e which is better SIP or Lumpsum?
When is SIP suitable?
Systematic Investment Plan (SIP) is an investment option available for mutual fund investors. Investors can invest a fixed sum on a regular basis. Also, one can start with a one time investment in SIP and then continue with regular periodic investments. SIP investing has multiple benefits.
Rupee cost averaging
Since the investment is spread over a period of time, the average cost of investing comes down. Therefore, investment in mutual funds through SIP are least affected by market volatility.
Bring Discipline into investing
Since the SIP amount is deducted automatically from your bank account every month and directed towards the mutual fund scheme. Thus, SIP brings out the much-required discipline in investing.
Prevent the problem of Market Timing
Since SIP gets you more number of units when the market is down, they lower the average cost of investing. This brings higher returns in the long term. Therefore, SIP investments are least affected due to rupee cost averaging. Moreover, one need not worry about the market volatility while investing through SIP in mutual funds.
You can stop, pause, change the amount and withdraw any amount from a SIP. One can choose an amount as small as INR 500 to invest in MFs.
But when and who should choose to invest through a SIP?
A regular income person can choose to invest in SIP. But why SIP is better?This reduces the burden to invest a lump sum amount at once. For a person investing in equity funds and looking for a long-term investment, SIP is highly recommended. Also, SIP investing works well in a falling market. This is because the investor can accumulate a large number of mutual fund units when the price is low. The growth rate will be high once the market picks up pace.
The main question is when is the right time to choose a SIP. Well anytime is the right time. Let the market be at an all-time high or low, it shouldn’t affect SIP investors. This is because it assumed that mutual fund investors invest for a long time (5-6 years minimum). However, investors do have in mind that is SIP better than one time investment? It is always recommended to invest through SIP for the long-term as investing throughout an entire business cycle is beneficial for the investors and they can reap high benefits. Moreover, the longer the investor stays, they can enjoy the benefit of power of compounding.
When is lump sum suitable?
Lump sum investing in a mutual fund suits investors who want to invest for the short-term in debt mutual funds. There is no point in investing in debt mutual funds through SIP. Rather a lump sum route should be used to invest in debt mutual funds as the recommended horizon for debt funds is less than 3 years.
So does that mean one cannot invest in equity funds mutual funds through lumpsum? Well, certainly not. One can invest in equity mutual funds through lump sum investment. Any form of windfall gains, profit from the sale of an asset or any surplus cash available can be invested in the market to earn a return on them. Even salaried individuals can invest through lump sum in mutual funds when they get a year-end bonus or festival bonus.
When to choose lump sum investment?
A lump sum investing approach in mutual funds tends to do well in a rising market. But what if they are wrong and the market falls? Well there is a way out for this. One can always opt for STP (Systematic Transfer Plan). An STP is a regular transfer of money from another mutual fund fund instead of your bank account. Instead of keeping the money in a bank you invest in a debt fund which has the potential to earn higher returns than a savings bank account. Choose a short-term fund debt fund and equity fund to do a STP within the same fund house. Then you can instruct the fund house to do a STP into an equity fund of your choice over a period of time. Thus, the major difference between lump sum and SIP is rupee cost averaging. One time investment fluctuates as per the market movements. On the other hand, SIP investment averages the cost of the units over time. Thus, one can choose SIP or lump sum for investment in mutual funds based on their investment objectives.
It can never be a SIP vs Lump sum. There is always an ‘and’ in between them as they go hand in hand. An investor cannot alone choose one type of investing option. Lump sum or SIP in mutual fund investing have their own benefits and work for different investors at different times. However, one has to understand the difference between SIP and lumpsum. Thus, it is always recommended to start investments early to enjoy the benefits of power of compounding in the long run.
However, it is advisable to pick an investment option (SIP or one time investment) based on your financial goals and voila you are earning returns on your investment!
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