SIP vs Lump sum Investments – Which is the best way to Invest ?
When investing in mutual funds, there are two ways you can go about – investing via a systematic investment plan (SIP) or through a one-time lump sum investment. Both these methods have their benefits, and the decision to choose either ultimately boils down to what’s convenient for you as an investor. Before we take our pick, let’s first get a deeper understanding of the finer nuances of both an SIP and a lump sum investment.
What is an SIP?
SIP is a disciplined form of investing where one commits to save and invest every month. In this case, a fixed amount gets deducted automatically from your bank account and is invested into the mutual fund schemes you have chosen. This is a recurring activity that happens on a specific date for a predetermined period of time.
The concept of SIP is quite simple – you start by first determining the amount of money you want to save and invest every month. The second step involves choosing the desired funds for investing. If you are unsure, you may want to take a free risk assessment on Paytm Money to know which risk profile you belong to and accordingly pick funds from the list given.
What is a lump sum investment?
Very simply put, a lump sum investment is when you invest an entire amount into a chosen equity mutual fund, at one go. You may have a substantial amount at your disposal and would like to invest it; putting that entire amount into one investment option is what we refer to as lump sum investment.
Lump sum or an SIP?
The answer to this question, to a huge extent, is dependent on what suits you best as an investor. if you have a substantial sum of money at your disposal and want to earn reasonable returns in the short run , investing via lump sum could be a good option for you. However, investing via SIP has its own benefits.
Benefits of SIP
1. Easy on the Wallet
SIP debunks the myth that you need to have an awful lot of money to be able to invest in mutual funds. You can, in fact, start investing with as little as Rs.100 every month and increase this amount with time.
2. Takes Away the Pressure of Timing the Market
Many investors often get broiled in confusion about when to invest or how best to time the market in order to make the most of the market returns. No matter what your level of expertise, there is always a significantly higher risk involved when you invest via lump sum. On the other hand, when investing via SIP, your investment is spread over time and this means that only a certain sum of your entire investment is subjected to market volatility.
3. Gives you Rupee Cost Averaging
When you invest via SIP, you are investing throughout the different stages of a market cycle. This simply means that when the market is low, you tend to get more units at a lesser cost and vice versa during market highs. What this does is reduces the per unit cost of the units purchased, thus averaging out the cost of investment.
4. Incorporates the Power of Compounding
When you invest via SIP, the interest earned on your investment is reinvested which means your returns themselves start earning interest. For instance, if you invest Rs.1000 every month at an interest rate of 10%, at the end of one year, you would have earned around Rs. 12,566.
5. Helps Build the Habit of Investing
SIPs help instill a sense of discipline as investors are committed to investing a fixed sum of money every month. Even if you were not a regular investor previously, with an SIP you are bound to become one.
While both these forms of investment have their benefits, for a budding investor, investing via SIP is the suitable way to go. It is also a good way for new investors to gain exposure to equities with less amount of investment. In investing, the important thing to keep in mind is to stay invested for long, and with the power of compounding in SIPs, the returns can be substantial.