Saturday, September 18

SIP OR LUMPSUM? WHICH IS THE BEST INVESTMENT MODE FOR YOU?

Some questions are everlasting. They keep haunting us every now and then. The world of investing is no less. Investors are often torn between SIP and lumpsum mode of investment. They often wonder which mode has the potential to generate greater returns in the future? This article aims to solve the dilemma and help investors decide between the most optimum mode of investment for their mutual funds.

Mutual fund investments provide exceptional flexibility to investors in modes of investment and different types of asset classes. That being said, the later isn’t that mystifying if you carefully assess your financial goals. However, a slightly overlooked yet equally significant aspect is choosing the appropriate mode of investment. There are two different ways to invest in mutual funds – SIP and Lumpsum.

What is an SIP?

SIP or systematic investment plan is a means to invest in mutual funds. Under SIP investment, an individual invests a pre-determined sum of money at regular intervals in their desired mutual fund schemes. The periodicity of the intervals can be daily, weekly, monthly, annually, etc. Under this disciplined form of investing, automated and regular investments are made against a particular mutual fund scheme.

What is lumpsum?

Under this mode of investment, an investor invests a substantial amount of money in a in one go. This method is often chosen to build superfluous wealth and liquidity. Unlike SIP investment, lumpsum investment requires to time of the market. Lumpsum mode of investment is usually recommended when the markets are continuously growing.

Pros and cons of lump sum investment

One of the main benefits of lumpsum investment is that they have the potential to provide significantly higher returns on mutual fund investments, provided that one time their investments properly. However, investors often overlook that it’s almost impossible to track the market and time their investments continuously. God forbid, if the timing is ticked off, one may incur a significant loss, one that might take ages to recover from. It is recommended to invest via lumpsum investment only if one has a high-risk appetitte and is prepared to wait long periods to fetch returns. On the plus side, longer duration equals higher returns, owing to the power of compounding.

Pros and cons of investing in SIP

Sip investments strive to instil financial discipline among investors. They also provide investors with the benefit of rupee cost averaging. In this concept, an investor buys more units of mutual funds when the markets are low and vice versa, thus averaging out the purchase cost of mutual funds. SIP mutual funds help to protect your investments from the volatility in the market in the long run.

SIP vs Lumpsum

Following are the differences between SIP and lumpsum:

Factors Lumpsum SIP
Cashflow Once Regular
Risk profile Moderate-high Low-moderate
Time of investment Subject to your investment goals and market volatility Subject to your investment goals but somewhat immune to market conditions
If an individual has an uncertain future income Relatively recommended Not recommended
Cost of investment High (requires a significant one-time investment) Less (thanks to rupee cost averaging)
Flexibility of investment Low High