The Buyt Desk
In a Systematic Investment Plan (SIP), a fixed amount is auto-debited from your bank account to purchase units of a mutual fund periodically whether quarterly, monthly, or weekly. In the lump sum mode of investment, you invest a large amount of money in a mutual fund at one time. Before we discuss which of these two modes is better, one thing should be clear. Mutual funds have a risk associated with them. Whether a first-time investor or a seasoned investor, every decision related to mutual funds requires good knowledge of the market. It is best to follow the advice of a certified financial consultant. In the same manner, consider the following features of SIP and lump sum investment before you choose a specific mode.
A large lump sum amount should be invested in mutual funds when the market has an upward trend. However, you can start a SIP at any time and do not need to monitor the market closely. In a SIP, the cost of your investment is averaged out because money is being invested regularly irrespective of whether the market is at a high or a low.
You can start a SIP with a minimum investment of Rs.500. However, the lump sum mode requires a higher investment of at least Rs.5000. Thus, it is easy to begin a SIP because it requires a low amount of investment. Also, SIP offers ease of operation. In SIP, you just have to give one-time instruction to the bank to deduct a fixed amount on a specific date and invest in the mutual fund of your choice.
SIP helps develop a discipline of saving money from your income regularly. This is the first step in personal finance management. On the other hand, the lump sum mode of investment is useful only when you have a corpus available, for instance, when an arrear or a bonus has been credited to your account.
The lump-sum mode of investment, if the units are bought when the market is at a low tide and sold when the market is at a high, can generate returns higher than a SIP. Nonetheless, it comes down to what works best for you. Are you able to squeeze your monthly budget to spare extra money for a SIP? Are you ready to take a risk with a large amount of money while investing a lump sum amount? Diversification is a safety value when dealing with mutual funds. Even while choosing the mode of investment, you can use the same principle. You may open a SIP for a mutual fund and invest a lump sum amount, when available, in another mutual fund. As a result, over a period, you can reap the benefits of both modes of investment.
