Mutual funds have witnessed a healthy growth over the years with increasing investments made by Indian households. People invest in mutual funds to achieve their goals and create wealth. When you invest in mutual funds, the same can be done through two modes – SIP or Lumpsum. Let us understand both.
What is an SIP in Mutual Funds?
An SIP or a systematic investment plan is a way of investing in mutual funds with a fixed amount at fixed dates. Let us know better with an example – If you get a monthly salary or a business income, you can choose to invest a part of it every month on a fixed date. Suppose your salary is INR 50,000 per month and you choose to start a SIP of INR 10,000 per month on the 15th for the next 10 years. Then, on the 15th of every month, INR 10,000 will be deducted from your bank account automatically. This will go on for the next 5 years unless you stop your SIP before 5 years. Thereby, an SIP is a disciplined way of investing in mutual funds without timing the market.
What is Lumpsum Investment in Mutual Funds?
A lumpsum investment in mutual funds means investing in one go and not on pre-fixed intervals. Suppose you have INR 25,000 that are lying idle in your bank account and you intend to invest this entire money in mutual funds then this is a lumpsum investment. Unlike SIPs, you can invest whenever you have spare funds at a date you wish to. Many investors intend to time the market and invest through lumpsum which is not the wisest thing to do. We will understand more about the perils of this strategy later.
Advantages of Investing Through SIP Over Lumpsum
Disciplined Investing – Many of us are hesitant in investing and no one can time the markets to perfection. SIP brings about a discipline in investing. Treat it like a “GOOD EMI” where your money goes to a mutual fund scheme that can deliver higher returns.
Rupee Cost Averaging – SIPs benefit from the concept of rupee cost averaging. Since you are investing every month at different levels of the market, your investment price gets averaged. When the market is falling, you accumulate higher units and, when the market is rising, you accumulate lesser units which is beneficial both ways.
Returns – Over a long period of time, returns from SIPs due to rupee cost averaging are better than the returns from lumpsum investments.
Achieving Goals – You can decide on the SIP amount and the type of mutual fund scheme and link it to achieving your goals. Suppose you want to buy a house after 10 years, based on the value of the house, you can start an SIP for the required amount and continue for the next 10 years.
Power of Compounding – SIPs should be done for a long period of time. The minimum period should be 10 years though there is no such compulsion and maximum should be the age till you are expecting to receive cash flows or earn. A longer period helps you in unlocking the benefits of compounding, your money multiplies with returns over a higher amount every year.
You can choose to invest through both SIP and lumpsum based on your cash flow. If you are salaried, starting an SIP is easier since you know your salary amount every month. If you are into business and do not have fixed cash flows, you can invest through lumpsum. Even in business, you should at least have a SIP maybe with a smaller amount for an inflow you are assured of to avail the advantages mentioned above. More than SIP vs lumpsum, it is important to invest and not leave your money idle in bank accounts. This way your money would work 24/7 and help you create wealth.