A mutual funds investment is not just about just finding the right schemes to invest in and get maximum returns but it’s also about choosing the right method to invest so that it does not overburden your existing finances. With mutual funds, you can make a one-time investment through a lump sum investment or opt for an SIP (systematic investment plan) where you invest periodically (daily, weekly, monthly, quarterly, etc.)
Both approaches offer great potential for building wealth; however, there are definite advantages to both approaches – each with its own unique benefits related to investment goals, risk appetite and financial capacity. Thus, the investment method you choose can make a huge difference in your investment portfolio. To know how, here is a detailed look at both timed lump sum and SIP methods of investing.
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What is lump sum investing?
Lump sum investing is when you put a large sum of money at once into the stock market or other forms of investments. This allows you to capitalise on the current market trends and conditions.
What is an SIP?
An SIP is an investment method or facility offered by mutual funds where you can invest a fixed amount in the selected mutual fund scheme at predefined intervals (weekly, monthly, quarterly, etc.).
SIP vs lump sum mutual fund – What works best?
- Emotional investing
Timed lump sums require investors to make decisions in real time which might be influenced by their emotions at that moment. For example, when the market suddenly drops or spikes, you as an investor may panic and sell your holdings or purchase more than you should. With SIPs, you don’t have to deal with emotions as much since you can automate the monthly payments, after which the funds will be bought automatically.
- Market volatility
Both lump sums and SIPs are affected by market volatility but in different ways. Since lump sums require making just one large investment all at once, you can choose exactly when you want to invest to capitalise on the rising market. However, timing your investments correctly requires skill and research or else you could face significant losses. Conversely, SIPs don’t need such market timing as investments are spread out over time. However, this approach can also mean missing out on any potential gains from predicting market movements correctly.
- Rupee cost averaging
When investing with a lump sum, you make a single large investment at once. This means that if the market fluctuates while your money is invested, there is no way to adjust your investment; you simply have to wait and see what happens.
On the other hand, when investing through SIPs, rupee cost averaging helps you protect against losses caused by market volatility. With an SIP plan, you automatically buy fewer units when prices are high and more units when prices are low – resulting in lower average costs and higher returns in the long run. A lump sum investment lacks this approach.
- Power of compounding
The power of compounding works better with a lump sum approach, as you can benefit from compounding returns on your entire principal investment from the beginning. This is faster than the staggered approach of an SIP mutual fund investment, where withholding the same amount per month or periodic payments limits the potential for added returns due to compounding.
The decision to invest in mutual funds through the SIP or lump sum method should be based on various factors, including your investment goals, income, risk-taking appetite, financial obligations, and available funds. You can also use a lump sum or mutual funds SIP calculator to get an idea of your investment returns under different scenarios and decide accordingly.