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One of the important things that individuals always feel puzzled about is the mode of investing in mutual funds whether it should be in lumpsum or Systematic Investment Plan (SIP) mode. So, let us first understand what is the difference between both the modes.
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Lump Sum Investment – A Timely Affair
Investing lumpsum, as the term implies, is putting a hefty amount at one go in a particular or a group of mutual funds. If you happen to invest at a time when the NAV (Net Asset Value) of the fund is at peak or if you invest in a bad performing fund, you may have to bear the brunt. It is like putting all your eggs in a basket. The positive side to it is, if you happen to choose a very good fund and invest at the right time, you can get very good results. So, you see timing is of the greatest essence here.
SIP – The Ease of Investment is Here
while resorting to SIP, as the name suggests, individuals need to deposit small amounts in mutual fund schemes at regular intervals. The main advantage of SIPs is averaging. As you know, markets move up and down and as a result, your regular investments in these funds take advantage of the fall and rise in markets (reflected in the NAV of mutual funds). Thus, though you may not expect blockbuster results from SIPs, still you will get above average returns if you stay invested for at least few years (possibly 5 years minimum).
Advantages of SIP investment over Lump Sum investment
When it comes to investing, the main objective is to generate returns. A prudent investor should always invest money in avenues where maximum returns can be churned at a given level of risk. With respect to mutual fund investments, individuals need to analyze the fund schemes that are in-line with their objectives. SIPs have a lot of advantages like rupee cost averaging, disciplined habits savings, and much more. These advantages are listed as follows.
Rupee Cost Averaging: Rupee cost averaging is a technique of investing in stock markets at regular intervals. By resorting to this method, investors are able to invest in mutual funds even when the stock markets are not performing well. As a result, they are able to purchase the units at a lower cost.
Long-term Tenure: The minimum tenure of SIPs is around six months and can extend up to a tenure of around 10, 20 or even 30 years. However, most individuals start a SIP with an objective or long-term savings wherein risk can be minimized.
Low Minimum Investment: The minimum investment in SIP starts from 500 rupees. Due to less minimum investment, SIP does not pinch the individual’s pockets. For a salaried individual, this one is more viable.