Is SIP Better or Lumpsum?

Don’t we love to be spoilt for choices? Unfortunately, that was not the case in the past for Indian investors. The financial market was only flooded with conservative investment avenues which offered fixed interest rates. Although there was guarantee of income, the profits were very thing. Investors had to invest large amounts for a longer time period. These schemes didn’t even offer any liquidity and investors were fined in case they had to prematurely withdraw their investment.

Thanks to the introduction of mutual funds, it has now become possible for investors to seek higher capital gains through regular and systematic investing. Mutual funds are known for their high risk rewards ratio. They offer active risk management, invest in a diversified portfolio of securities and are known to offer far better capital gains as compared to traditional investment avenues. Another good thing about most mutual fund is that they are highly liquid. Investors are free to buy or sell mutual fund units on any working day. Asset Management Companies who own mutual funds hire experienced fund managers. It is the duty of the fund manager to buy / sell securities in quantum with the scheme’s investment objective
and its underlying index.

Market regulator SEBI (Securities and Exchange Board of India), define mutual funds as –
a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced

Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value). Depending on the nature of the scheme and its investment objective, a mutual fund may invest across various money market instruments like equity, debt, government securities, corporate bonds, treasury bills, company fixed deposits, etc. The performance of a mutual fund scheme depends on the performance of its underlying assets and the various sectors and industries in which it invests.

What is SIP and Lumpsum Investment?

Mutual fund investors have the option of either making a one time lumpsum investment or starting a SIP.

Lumpsum investment: The traditional way to invest in mutual funds is to make a onetime lumpsum investment. Investors must invest the entire investment amount right at the beginning of the investment cycle. Onetime lumpsum investment is the traditional way to invest in mutual funds.

SIP: Systematic Investment Plan, short for SIP, is a convenient way to invest in mutual funds. One has to be a KYC compliant individual in order to invest in mutual funds via SIP. All an investor has to do is complete a one time mandate with their bank following which every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred to the mutual fund.

What is better – SIP or Lumpsum investment?

Both SIP and lumpsum investment has its own pros and cons. When you make a one time lumpsum investment, you are allotted units in large quantities. However, your entire investment amount is exposed to market volatility right from the beginning.

One the other hand, SIP gives investors an opportunity to invest small amounts at regular intervals. If you continue investing in mutual funds via SIP over the long term, you can benefit from the power of compounding. If the NAV of the fund is high, lesser units will be allotted. Similarly, when the NAV is low more units are allotted. This is known as rupee cost averaging and can only be benefited from SIP investing.

SIP investors can also refer to the online SIP calculator to determine how much money you must invest at regular intervals in order to achieve their life’s long term goals.