Investments are a big thing in todayās world. But the investments that you are going to make must be in alignment with your financial profile. Apart from which investment schemes to invest in, one should also choose how to invest.
One can opt to make a one-time investment or spread the investment over a while. The mode of investment makes a difference in your investment portfolio.
Depending on their affordability, one can invest inĀ LumpSumĀ or via Systematic Investment Plan,Ā akaĀ SIP.
SIP Vs LumpSum
Both of these investment plans allow an investor to make wealth through mutual funds. The frequency of investment is the primary difference between a SIP and a lump sum method.
SIPĀ
SIP allows the investor to invest money into mutual funds periodically,Ā vizĀ daily, weekly, monthly, etc.
The minimum amount you can begin with to invest in SIP is Rs 500 per month. SIP is a suitable method for an investor with a small but regular amount available for investment.
A SIP isĀ the most convenient way to invest in a mutual fund scheme, and it evenĀ allows for staggering the assets over time.
SIPs are open-ended,Ā i.e.Ā one can initiate orĀ terminate a SIP at any time. Also, no penalties are levied on the investorĀ for ending or pausing the SIP.
Ā How to Invest in SIP?
- First of all, one needs to establish a mutual fund suitable for them.
- Then, link your bank account with your investment account.
- You can make the SIP investment by either activating ECS or by asking your bank to deposit a definite amount from your account into your chosen mutual fund scheme on pre-determined dates.
You just need to log in to your investment account and fill and submit the āstop SIPā form to stop a SIP.
LumpSumĀ
LumpSum, on the other hand, is a one-time bulk investment. You need a minimum of Rs 1,000 per month to begin a lump sum investment.
A lump sum investment is suitable for investors having relatively high investment amounts and risk tolerance.
How to Invest inĀ LumpSum?
- One way to invest in a lump sum is by investing in a liquid fund and then transferring it into an equity fund.
- The investor then needs to fill a standard KYC form to be KYC compliant.
- Choose a liquid fund and equity fund of the same house.
- To invest in a liquid fund, fill a mutual fund application form to make a purchase.
- The investor then needs to submit an STP form indicating the transfer scheme. One must also mention the period of transfer viz weekly, quarterly or monthly.
One can stop the STP instruction at any time by giving a written request. Also note, that every transfer is subject to capital gains tax.
Comparison of the two methods: Why SIP is Preferred?
Investors mainly prefer SIP because of the benefits it offers over lump sum investment. Some of the benefits are as below:
One Does Not Have to Monitor the Market Closely
SIP mode of investment allows the investor to enter during different market cycles. Consequently, one does not have to watch the market trends closely.
Whereas a Lump sum investor needs to know the market, as the investment is more beneficial if made during a market low.
The investor must know when the investment is being made in the market, as a lump sum investment is a big commitment.
Low Investment Requirement
As stated above, you can begin a SIP with an amount as little as Rs 500 per month, whereas you need at least Rs 1,000 per month for aĀ LumpSumĀ investment.
Meanwhile, most mutual funds in India have a lower limit set at Rs 5,000 for investment via a lump sum. SIP investment also offers a SIP calculator for easy calculation and estimation of returns.
Average Costs
Since a SIP allows funds purchasesĀ during different market cycles, moreĀ units are usually purchased at a marketĀ low. This fact compensates for the purchases made duringĀ a market highĀ andĀ evens out the market fluctuations.
Power of Compounding
SIP offers a compounding effect that reinvests the interest into the scheme, generating more significant returns.
Inculcated Financial Discipline
SIP helps one inculcate financial discipline. Banks also offer a provision to set up an automatic investment instruction at a frequency you choose.
What Happens During Market Lows?
Ill-timed investment results in losses and makes the investor may shy away from pumping in money again.
An investor needs to know the market cycles before investing a lump sum amount in a mutual fund. An investment at the right time can garner higher returns.
A lump sum investment is always made on the principle of- āBuying low and selling highā. Only a seasoned investor with enough market knowledge can benefit from a lump sum investment. AĀ LumpSumĀ investment is also beneficial to the investors in the following ways:
- It offers considerable returns for long-term investment plans.
- It is a one-time payment only.
- It helps in achieving specific financial plans like investing in a retirement fund.
Factors to Consider Before Investing
The following factors are worth considering while deciding the correct investment route:
Amount
A lump sum investment is an excellent way to go if you have a bulk amount and you do not want to end up spending it. Whereas, if you are a salaried person trying to practice a savings habit, SIP is the more suited route.
Fund Type
Market volatility is a huge factor in deciding returns, and debt funds are less likely to be affected by market trends and give similar returns for SIP and lump sum investments. Equity funds, on the other hand, are market volatile.
Market Timing
AĀ LumpSumĀ investment generates higher returns during a market low. But, if you are unwilling to keep track of market trends, SIP will help you distribute the risk.
Choosing one mode of investment over the other should be based on your requirements. One must consider factors like income, financial stability, and risk capacity before selecting an investment route.
Experts believe a SIP is superior to a lump sum investment as it helps you tide over market fluctuations and does not require frequent monitoring of financial marketsā trends. Either way, having some form of investment is better than none.
