SIP vs Mutual Fund - Is Investing In Mutual Funds via SIP Is Better Than Lumpsum Investment?

If you are someone who is new to investing and keen on finding a scheme that may fit your requirements, you need to first make a financial plan. Financial planning may seem like an intriguing process but it is quite simple to be fair. It asks investors to manage their money wisely and to determine their short term and long term financial goals. When you comprehensively evaluate your current financial condition, you get a clearer perspective on how or where you may have to invest in order to make it better.

Investors, before putting their hard earned money in any type of financial scheme must determine their risk appetite first. A risk appetite is the ability an individual possesses to invest. It is the certain level of risk one can take with their finances with the hope of earning capital appreciation in the future. If you are someone with a traditional investment approach, you may have low risk appetite. In such scenarios, investors generally turn to investment avenues that offer fixed interest rates. These conservative schemes however offer interest rates that are on the lower sider. Investors may or may not be able to achieve their ultimate financial goal through investments in such schemes. However, those individuals who do not mind taking some added risk and wish to give their investment portfolio an aggressive approach can consider investing in mutual funds.

Mutual funds are market linked schemes that do not offer any fixed capital appreciation. However, they offer active risk management and are also supposed to carry a diversified investment portfolio. Several investors are transitioning from traditional investment vehicles to mutual funds because they are considered to carry a decent risk/reward ratio.

Mutual funds invest across multiple asset classes like equity and debt. Assets are allocated depending on the nature of the scheme and the risk profile that it carries. Mutual fund investors are allotted units in quantum with the investment amount and also depending on the nature of the scheme. It is believed that the performance of a mutual fund depends on the performance of its underlying assets as well as market movements.

What is SIP and Lump sum investment?

As a mutual fund investor you can either stick to the traditional way of investment i.e. making a lump sum investment or you can opt for starting a mutual fund SIP. To find out the difference between SIP and lump sum and to determine which mode of investment is more effective, we need to understand these two terms in detail.

Lump sum investment

One generally opts for lump sum investment if they have a surplus cash parked and feel that can put it to better use. A good thing about investment is that investors are allotted mutual fund units in large quantities in quantum with the investment amount and also depending on the fund’s current net asset value (NAV).

SIP investment

Systematic Investment Plan, abbreviated as SIP an easy and convenient mode of investing in mutual funds. Earlier investors only had the option of making a lump sum investment in mutual funds. But nowadays, you can give your mutual fund investments a systematic approach by starting a mutual fund SIP. SIP is an electronic payment option where all you need to do is instruct your bank and every month on a predetermined date; a fixed amount is debited from your savings account and directed towards your mutual fund.

Is SIP better than Lump Sum? If so, why?

Investing in mutual funds through SIP may have several advantages as compared to making a lump sum investment. Here is why:

When you start a mutual fund SIP, you have an opportunity to buy NAV units over a longer time period. This gives investors an advantage of taking advantage of making the most out of rising and falling market conditions. When the NAV of the fund is low, investors are allotted more units. Similarly, when the NAV of the fund is high, lesser units are allotted. This is referred to as rupee cost averaging. Investors do not need a large amount to make an investment in mutual funds through SIP. They can decide a fixed amount that they are comfortable with and invest this amount at regular intervals till their investment objective is achieved. Investing in mutual funds over the long run through systematic investing may also allow investments to benefit from the power of compounding. You can even stop an investment in mutual funds through SIP at any point of time. Investors are not obligated to carry on their investments for any particular time frame.

These are some of the benefits of investing in mutual funds through SIP. So next time you plan on investing in mutual funds, will you invest through a lump sum payment or start a SIP?

Mutual fund investments are subject to market risks, read all scheme related information carefully.