sip or lumpsum which is better: Thinking of investing in mutual funds, but are trapped between SIP (Systematic Investment Plan) and Lumpsum (lump sum) investment? This question comes in the mind of every new and experienced investor. Both methods are effective ways to invest money in mutual funds, but one way can be better than another depending on your financial situation, target and market understanding. Let us understand both these options in detail and know what is the best for you.
SIP (Systematic Investment Plan): Mantra of discipline
SIP means Systematic Investment Plan. As the name suggests, you invest in a certain and small amount of mutual funds at regular intervals (eg monthly, quarterly). It is a great option for salaried persons or those who have regular income.
Sip Benefits of:
, Discipline and savings habit: SIP teaches you discipline to save and invest every month. This is the best for those who do not save large amounts simultaneously.
, Average cost of rupee (Rupee cost averaging): This is the biggest advantage of SIP. When the market is below, your investment provides more units, and when the market is up, less units are available. In this way, over time your average purchase cost decreases, reducing the risk of market fluctuations.
, low risk: The market time does not have to worry. Your money continues to invest, whether the market goes up or down.
, Compounding magic: In the long term, the return on regular investment keeps on investing again, causing your money grow faster (benefit of compound interest).
, resilience: You can increase your SIP amount, reduce it or stop for some time.
Sip For whom is,
• Employed people or persons with regular income.
• Those who want to reduce market risk.
• Those who do not have lump sum money.
• Those who want to invest for a long time in a disciplined manner.
Lumpsum (Landless) Investment: Benefits of Opportunity
Lumpsum investment means investing in a large amount of mutual funds at a time. It is suitable for those who suddenly have a large amount, such as bonus, inherited property, or money from selling property.
Lumpsum Benefits of:
, Full advantage of market surge: If you invest outright at the bottom of the market (when units are cheaper) and then the market gets fast, then you can get more quick returns.
, Immediate benefits of compounding: Since the entire amount is invested simultaneously, it starts getting the benefit of immediate compounding.
, Easy: Invest once and then become anxiety free (although regular review is necessary).
Lumpsum For whom is,
• Those who have a huge amount ready to invest.
• Those who have a deep understanding of the market and can invest at the right time (ie knowledge of ‘market timing’).
• Those who are ready to take more risk comparatively, especially if the market collapses immediately after investment.
• Whose investment attitude is long so that they can overcome the initial shaking of the market.
What you should choose,
Both SIP and Lumpsum are good ways to invest. The best option depends on your personal financial status, risk tolerance and investment goals:
• If you are new investors, earning regular income and are concerned with market instability, SIP is the safest and effective way for you. It keeps you disciplined and gives you the benefit of the average cost of the rupee.
• If you have a huge amount and you understand the market move (or your financial advisor advises that the market is at the lower level), then you can consider lumpsum investment. However, it has a high risk that if the market falls immediately after your investment.
• Many investors also adopt a mixture of both. For example, if they get a huge amount, they immediately keep it in a liquid fund and then gradually transfer it to their favorite equity funds via SIP (it is also called Systematic Transfer Plan – STP). It brings the benefits of both lumpsum and SIP together.
The conclusion is that no one method is universally correct. Assess your needs, seek specialist advice and then take an informed decision. Remember, mutual fund investment is subject to market risks, so always read the documents related to the scheme carefully before investing.
Also Read: New Investment Option SIF is being launched in the country! Learn how to separate from SIP and who can invest
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