In recent years, mutual funds have emerged as a great investment avenue for participating in equity markets. In the era of low fixed-income returns, mutual funds provide a way to add a high-return instrument that perks up the overall return in any portfolio.
A new investor may not have the time or expertise to manage direct stock investments. Professional fund management, diversification, and low costs make mutual funds an attractive vehicle for experienced and new investors.
You can invest in mutual funds in two modes: as a one-time lump sum and periodically. Like a recurring deposit, mutual funds also allow regular investments with a Systematic Investment Plan or SIP. But first-time investors often face a dilemma: should they take the lump sum one-time investment route or make it a SIP fund?
Let us evaluate the features of both.
Discipline is the key to achieve any goal in life, even financial goals.
A SIP is an efficient way to adopt a savings and investment habit early in life. When you invest in a SIP fund, it ensures that a fixed sum is deducted every month from your account. Thus, it helps you plan your monthly budget and allocate your savings for high-return investments. You can set the deduction to be on the day you receive your salary so that investments happen along with your usual expenditure.
SIP funds offer a considerable advantage by automating the investment process.
Once you choose a mutual fund, the decision part is over. A fixed amount is debited every month on a selected date without your intervention. It saves time, effort, and the willpower you need to contemplate every time before investing. Instead, like a good habit, you practice an investment habit every month. Meanwhile, the SIP fund corpus gradually accumulates and grows steadily over time.
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- Rupee cost averaging
Stock markets are volatile by nature. SIP funds ensure that you buy more units for the same investment amount when the market is low. When it is headed upwards, you buy a lesser number of pricier units. In a way, the principle of ‘bargain buying’ reduces the average cost of purchase and gives better returns in the long run.
For example, if you invest in a fund with a NAV of Rs. 20 today, you will buy 500 units for Rs. 10,000 in a month. When the market is high, the NAV is Rs. 25; then, you buy only 400 units. If the NAV reduces to Rs. 15, you buy more units, i.e., 666.
This way of purchasing more units at a lower price and less at a higher price is a win-win situation.
- Low minimum threshold
Most mutual funds allow a minimum of Rs. 500–1000 as the SIP fund amount, making it easier to commit to regularly saving every month. Often, you have to wait to save enough for big investments. But with SIP funds, you can start small, even without a large surplus. As your income increases, you can increase the SIP fund amount gradually.
- No need to time the market
Stock markets are inherently volatile. A new investor is often apprehensive to invest a significant amount in one go. But it is impossible to time the market. You need to invest in the right fund and stay invested. With a SIP, you need not wait and watch and time the market. You can ride out the volatility with regular SIP fund investments at all times.
- Power of compounding
It is always better to invest regularly, even if the amount is small. The installments invested in the beginning, even though small, continue to grow at a compounded rate year on year with the market.
When does a lump sum investment make sense?
While SIP funds have many advantages, it does not mean that you must ignore lump sum investments completely.
Suppose you have a significant investment surplus, for example, from a bonus, selling another asset, pooled savings, etc. You can then invest the amount at one go so that the money does not stay idle or get spent.
You must have a long-term horizon and stay invested over the ups and downs without losing your nerve in equity funds. An excellent underlying portfolio of stocks and active fund management will bring in returns over the long term. It is essential to recognize the market cycle and understand the current levels while committing to lump sum funds.
In conclusion: lumpsum funds or SIP funds?
Depending on the pool of money available, you can choose to invest with a SIP fund, a lumpsum fund, or both. Both modes are suitable depending on your investment needs and the availability of funds.
For debt or liquid funds, a lumpsum investment is more suitable than the SIP fund route.
It depends on your risk appetite too. A SIP fund is an excellent tool for those with modest monthly savings who want to gain better returns in equity markets while taking on less risk. On the other hand, a lumpsum fund is suitable for investors with some experience in equity markets.
In the short term, the investment may fluctuate in value. However, equity is suitable for higher growth if you have a good risk appetite, whether through the lumpsum or SIP fund routes.