People nowadays understand that small savings will not help them achieve their long-term financial goals. Investment in various financial instruments is the only way to make wealth grow. One of the most popular investments today is mutual funds. But, even in mutual funds, investors have a lot of options to choose how they want to invest. In this write-up, we discuss the two main ways to invest in mutual funds.
You can invest in mutual funds by approaching any bank or Non-banking Financial Company (NBFC). All you have to do is decide how you want to invest in mutual funds and choose the mutual fund itself, which brings us to the two main ways you can invest in mutual funds.
If you want to invest in mutual funds with a lump sum amount, you can do so by investing any amount that you wish as a one-time payment. For example, if you have Rs. 100,000 that you are willing to invest in its entirety, you can invest it in mutual funds as a lump sum amount. A lump sum investment is most suitable for persons with a significant amount of money readily available and those with a considerable risk tolerance to invest that money in its entirety in one go.
The other and the most popular way to invest in mutual funds is through Systematic Investment Plan or SIP. A SIP is a brilliant way by which anyone from daily wage workers to middle and middle-class people can invest money without burning a hole in their pocket. In a SIP, the investor makes regular monthly investments of a fixed amount on a pre-decided date for as long as they wish, or until a SIP end date, if specified earlier.
For example, if you do not want to make a lump sum investment of Rs. 100,000, you can start a SIP. Let’s say you start a SIP of Rs. 5000 for three years. Every month, on a date decided by you, Rs. 5000 will be automatically deducted from your account for your mutual funds investment for three years.
To see which one comes out on top in the lump sum vs SIP battle, let us get into the details.
Since SIP keeps investing irrespective of how the market is behaving, your fixed amount will fetch more units when the market is low and fewer units when the market is high. So, over the long term, the cost per unit will be average for you because you kept on investing, thus lowering your losses.
Timing the market is essential when investing a lump sum amount because you do want the most value for your investment since it’s a one-time payment. Doing this can be very tricky and requires experience in investing. However, since a SIP requires you to invest every month, there is no need to time the market. This makes SIP an excellent option for inexperienced investors.
A lump sum amount is very arbitrary. You can be tempted to invest more and more, or you may forget to invest because of a busy schedule. All this is ruled out when you consider SIPs. A fixed amount every month means it is a disciplined form of investment, with no chance of skipping investments. It also creates a habit of investing regularly within investors.
New investors can be overwhelmed by the volatility of the market, and may not be able to understand how to time the market. For them, SIPs are a godsend because they can start investing small amounts regularly and take their time to understand the market.
Therefore, it is evident from the above advantages that a SIP is the more preferred way of investment for most of the general population. It is easy, convenient and is not a burden on one’s pocket. But is lump sum investment disadvantageous? Of course not. It tends to give much higher returns than SIP in a rising market. But in falling markets, SIP is still king. So if you’re looking for a long term investment option where you want to build your corpus bit by bit, then SIP is the way to go.