Should You Start A SIP Or Make A Lump Sum In Equity Funds?

Equity Mutual Funds are those mutual funds that predominantly invest in equity and equity related instruments. This is the reason why equity mutual funds are primarily known to carry a high-risk profile. They have a high-risk rewards ratio. That means that even though investments in equity mutual funds are risky, they also hold the potential to generate far better capital gains as compared to traditional investment avenues. What Asset Management Companies owning equity funds do is that they collect money from investors seeking capital appreciation through investment in equity funds and invest this pool of funds in company stocks and other money market instruments. Investments in equity funds have historically fetched better returns for those who have remained patient with their investments and kept a long-term investment horizon.

There are multiple ways to make an investment in equity mutual funds. Mutual fund investors have the option of either making a lump sum investment or starting a SIP in equity funds. 

What is lumpsum investment?

 A lump sum investment is a one-time payment which investors make towards the equity mutual funds. Investors need to pay this investment amount right at the beginning of the investment cycle. When you make a lump sum investment you are allotted equity fund units in quantum with your investment amount and depending on the funds existing net asset value (NAV). Depending on the performance of the scheme the NAVs allotted may increase or decrease in value over time. At the time of investment, the net asset value of the equity fund is low investors will be allotted more units. This is one of the major advantages of investing in equity funds through lumpsum investment. However, your entire investment amount is exposed to the market’s volatile nature.

What is Systematic Investment Plan?

While lump sum payment is a traditional way to make an investment in a mutual fund, that other way to invest in mutual funds is through a systematic investment plan (SIP). If you do not have a surplus amount at your disposal you can still invest in mutual funds via SIP. A systematic investment plan is an easy and convenient way to invest in equity funds. All an investor must do is complete a one-time mandate with their bank following which every month on a fixed, at a predetermined amount will be debited from the savings account in electronic to transfer to the fund. 

What is better – SIP or Lumpsum?

Investing in equity funds via SIP has its own advantages. The biggest advantage investors hold is that they benefit from the power of compounding. Mutual Funds compounding refers to the interest on the interest earned from the principal investment amount. Whenever a mutual fund scheme is capital appreciation these profits are invested by can to this scheme. Over the long-term, thanks to the power of compounding your small SIP investment amounts may multiply and turn into a large corpus. Several investors target their life’s long-term financial goals like building a retirement corpus or buying a weekend home or giving their daughter a destination wedding or sending the children overseas for foreign education through SIP. Another good thing about SIP investments is that only the amount that you invest on a monthly basis is exposed to market volatility unlike lump sum payment where the entire investment is at stake right from the beginning of the investment cycle.

Although equity funds are known to offer capital appreciation over the long-term investors should keep in mind that investments made in these financial products do not offer guaranteed returns. It is better to consult a financial advisor before making an investment decision.

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