When it comes to investing in mutual funds, one question that confuses many investors is whether to take the Systematic Investment Plan (SIP) route or opt for lump sum investment. A lot has been written comparing the two, but they are different not only in terms of returns, but also in the way your money is invested. You take the lump sum route when you have enough money to invest in one go. Whereas you take the SIP route when you are sure that you can make a fixed monthly contribution to be invested regularly.
Let us understand them better:
How SIP Works For You
SIP splits your investment into instalments, saving you from the pressure of liquidity availability. It also mitigates the risk of heavy capital losses due to a sudden market crash because you do not invest all your money at once. Since SIP offers the benefit of Rupee cost averaging, your investment portfolio always remains close to the profit line even under the adverse market condition. It also helps in diversifying your portfolio to align it with your financial goal and to cut down risk level. You can also increase the instalment assigned for SIP with an increase in income in the future.
While selecting a scheme, do consider your risk appetite, return expectation and corpus required in line with your financial goal. For example, you can invest in an equity mutual fund SIP for a financial goal scheduled after ten years or in a debt fund SIP for a crucial financial goal planned after five years. Long-term SIP reduces the risk in equity mutual fund to some extent. SIPs are more effective when the market is volatile and when you’re unsure of market trends. While investing in SIPs, investors don’t need to time the market, but they need to invest in a regular interval for long-term to build wealth.
Lump sum Investment
Lump sum investment can give you an impressive return in the long run provided you have timed the market appropriately. An investment done when the markets are low is expected to give good returns. If you are looking for a low to moderate return, then lump sum investment in the debt fund is a good idea. While investing in the equity fund, you should take a long-term view. Always diversify the lump sum investment across various schemes while choosing the equity fund.
Investors with patience and high-risk appetite can take exposure in lump sum investment in the equity mutual fund.
If you are a senior citizen or close to retirement, it is better to avoid taking significant exposure in an equity fund with a lump sum amount. You can use the lump sum amount for a lump sum investment in a short-term debt fund to be on the safe side.
Always use lump sum investments as a tool to top-up your investment when the market is down, and you are expecting a recovery very soon. You can also use the lump sum corpus to invest in a debt fund and take a Systematic Withdrawal Plan (SWP) to invest in an equity mutual fund SIP to get the benefit of Rupee cost averaging and reduce the risk to some extent.
You must take care of tax on gains from mutual fund investments when selecting the right option between SIP and lump sum investment. Make your investment choice carefully according to your financial goal and risk appetite. It is always wise to consult your investment advisor before investing money in the mutual fund.
The writer is CEO, BankBazaar.com
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.