Investments
When you plan to buy a house, you generally have two options—pay for it in one go or through EMIs. The situation is somewhat similar in mutual funds—you can either take the SIP (like EMIs) route or the lump sum (like a one-time payment) route. Let’s examine which is better: SIP or lump sum. Before moving ahead, let’s understand the basics of SIP and lump sum investments.
With SIP, you can invest a fixed or small amount of money on a predetermined date at regular intervals. This interval can be daily, weekly, fortnightly, monthly, or quarterly. The minimum investment for an SIP is ₹500, though some mutual fund houses allow you to start an SIP with just ₹100. You become the owner of mutual fund units on your chosen SIP date.
In a lump sum investment, you invest the entire amount at once. The minimum amount required is ₹100, and you immediately become the owner of the mutual fund units. Remember, you can start with SIP and make lump sum investments whenever you have surplus investable funds for the long term.
Determining the right time to invest can be challenging. SIP eliminates this concern. Over the long run, SIP mitigates market volatility and allows investors to benefit in all market conditions.
You can start an SIP with just ₹100. In times of financial distress, you can pause your SIP and restart it later. Additionally, you can choose the SIP date. Salaried individuals can select a date soon after their salary is credited.
Since SIP investments are made regularly on fixed dates, and the amount is automatically debited, it instils financial discipline, ensuring regularity in investments and maintaining sufficient funds in the account.
With SIP, investments occur at regular intervals. If the market falls, you acquire more units, and when the market rises, the value of your units increases. Over time, this lowers the average per-unit cost, leading to higher returns.
Certain situations make lump sum investments more beneficial than SIP investments.
Investing a larger amount in a rising market can lead to better returns. Consider an example where a mutual fund unit’s value increases by 1% in a month:
This example demonstrates that Investor B’s higher investment results in greater absolute gains than Investor A’s smaller investments, despite the percentage increase being the same.
An investor may opt for a lump sum investment if they receive a large sum of money, such as from selling a property, receiving arrears of past dues, or getting an annual bonus. In such cases, investing surplus funds in mutual funds is preferable to keeping them in a savings account for better returns.
If you plan to invest for a short period, such as in debt mutual funds, lump sum investments make more sense. SIPs typically yield better returns over the long term.
To determine whether SIP or lump sum is better for you, refer to the chart below and decide based on your cash flow, time horizon, investment profile, and financial goals.
It is essential to understand that choosing between SIP and lump sum is not a matter of selecting one over the other. Both strategies are two sides of the investment coin, each with its advantages and disadvantages. Depending on your financial situation, investment appetite, and market conditions, you should choose the best option. You may even combine both approaches to maximise returns.
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