What Makes SIP a Better Investment Option Than Lump Sum?

Those who are new to mutual fund investing, it is better to understand your appetite for risk entrusting your money at the hands of the fund manager. That’s because mutual funds are a pool of professionally managed funds where the fund manager must execute a strategy such that the scheme is able to outperform its underlying benchmark and help investors earn capital appreciation over the long term. What fund houses do is that they collect money from investors and collectively invest this capital raised to achieve a common investment objective.

Mutual funds investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV. The monetary value of the allotted NAV might fluctuate depending on the performance of that particular mutual fund scheme.

Mutual fund schemes offer multiple investment options

If you are planning on investing in mutual funds to achieve your life’s long term financial goals, you can either start a monthly SIP or opt for one time lump sum investment. Lump sum investing the most basic way to invest in mutual fund schemes where an individual invests the entire investment amount right at the beginning of the investment cycle. However, if you are investing in high risk schemes like equity mutual funds, you end up exposing your entire investment amount to market’s volatile nature. On the other hand, if you wish to inculcate the discipline of regular investing, you can opt for a Systematic Investment Plan (SIP).

The term SIP has become so common in the mutual fund industry that some even confuse it to be mutual funds itself. However, SIP is a method of investing in mutual funds. All an individual has to do is decide how much he or she wishes to invest in mutual funds and one can start investing in mutual funds from the comfort of their home or office using a laptop or a smartphone and a decent internet connection. The beauty of SIP investing is that one can start investing in mutual funds via SIP with an amount as low as Rs. 500 per month.

What is better? SIP or Lump sum?

Once you decide how much you wish to invest per month via SIP, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the mutual fund of their choice. However, investors need to allow auto debit for the money to get debited from their savings account and credited to their mutual fund portfolio.

If you have surplus cash sitting idle, you make a lump sum investment towards a mutual fund scheme of your choice. However, if you wish to inculcate the discipline of regular investing and wish to target your life’s long term financial goals, you can consider starting a SIP in mutual fund scheme. mutual funds investors who start a monthly SIP are known to benefit from power of compounding. Compounding in mutual funds refers to the phenomenon where you start earning interest on the interest earned from the initial investment amount. If you wish to achieve a commendable corpus over the course of 10 to 15 years, starting a SIP in mutual funds might help as you are going to benefit from the power of compounding.

SIP investors are also known to benefit from rupee cost averaging. When the NAV of the scheme is low, more units are allotted. Similarly, when the NAV of the scheme is high, lesser units are allotted. This allotment of units depending on the fluctuating NAV is referred to as rupee cost averaging and is known to minimize your overall investment risk.

Retail investors are expected to consult a financial advisor before investing in mutual fund schemes.

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