Mutual funds are a sought-after investment option for many investors due to the many benefits they offer. These include high returns, diversification and ease of investment. There are two modes of investing in mutual funds – Systematic Investment Plans (SIPs) and lumpsum. SIPs allow you to invest a fixed small amount at regular intervals. On the other hand, lumpsum investments include a one-time large amount as an investment.
The article compares SIP v/s lumpsum to decide the better way of making mutual fund investments.
Benefits of SIPs in Mutual Funds Over lumpsum Investment
- Ideal for new investors
SIPs can be an ideal investment route for novice investors looking to enter the equity market. It can allow them to start with small investments and spread the risk over the investment duration.
- Flexibility in investing
SIPs start as low as Rs.500. Besides, you have the flexibility to raise the SIP amount whenever you wish. Since only a portion of your total investment is exposed to the market at any given time, the market risk can be comparatively lower.
- Rupee cost averaging
SIPs provide an entry into the market at different levels. Thus, it can help average the purchase cost of units in the long run. When markets are low, you end up purchasing more units. Conversely, when markets are high, you purchase fewer units.
Merits of lumpsum Investments Over SIP
- Perfect in a rising market
Lumpsum investments tend to fetch better returns, compared to SIP investments, in a rising market. In other words, when market trends are showing upward growth, it can draw high yields as a hefty amount is invested in the bull market.
- Ideal for self-employed individuals
For self-employed individuals or businessmen, their source of income may be seasonal, i.e., not fixed or monthly. It can be challenging to keep track of monthly SIP payments in such a scenario. Whereas, a salaried employee may find it easier to set aside some money from their monthly income to direct it towards SIPs.
How to decide which one is better?
Mutual fund advisors recommend investing in mutual funds via SIPs as it instils a sense of financial discipline. Additionally, there is no need to monitor the market constantly during its highs and lows as investments via SIP are spread over time.
On the other hand, lumpsum investments can help you create significant corpus in the long run. As you invest a hefty sum at one go, the power of compounding can multiply your income and help you reach your financial goals sooner.
Thus, if you are a self-employed individual with seasonal revenues, you can invest in mutual funds via lumpsum payments. For salaried individuals with a regular monthly income, SIP investments can be well-suited. If you are a new investor, you can read more on how to invest in SIP or consider taking the help of a professional mutual fund portfolio manager. Remember, regardless of the investment mode you choose, it is essential to assess your risk tolerance and know your investment horizon before you invest.