When you are ready to invest, a question may strike you as to whether you should invest a large sum of money in one go or should you go the SIP route. The answer to that honestly depends on a lot of things, starting with what amount of disposable cash you as an investor have. But before we move on, let’s first understand the difference between the lump sum and SIP investment routes.
What is a lump sum investment?
If there is a huge amount of money that you have, say the kind of amount you would traditionally put in a fixed deposit, then you can consider the option of opting for a lump sum investment.
A lump sum investment is a large sum of money paid as a one-time investment to a fund. This requires a lot of forethought and research into market conditions and the performance of the particular fund before committing such a large amount.
Pros & Cons of making lump sum investments
If you come into a large amount of money, this route ensures the money is invested, not spent.
Secondly, if you understand market trends, then investing a lump sum amount in a mutual fund could get you high returns. However, such an investor should have a considerable appetite for risk because if anything goes awry with the fund or the market, then the entire amount could be compromised in the immediate term. Though in the long term, these risks would average out.
This is a good option for those wishing to make a one-time investment toward long-term goals eg., retirement fund, children’s education etc. But, do bear in mind, to get significant returns, you have to stay invested for the long-term, i.e., 7-10 years.
But yes, the first condition is that you have such an amount of money lying around with you.
What is an SIP?
An SIP or a systematic investment plan, on the other hand, doesn’t require significant capital. It does require discipline, though.
Put simply, investing via an SIP route means investing a fixed amount at fixed time intervals - weekly, monthly, quarterly etc. Some SIPs start with an investment as low as Rs. 100. When one is starting out investing, a lot of fund managers recommend starting with an SIP.
Pros & Cons of the SIP route
You can start small. You do not need huge amounts of money at your disposal to start investing.
This inculcates a habit of saving and investing in the investor. An SIP essentially borrows from the banking concept of recurring deposits in that way. However, the aim of the SIP is not to just save but to help the money to make more money.
SIP is one of the best investment options for younger professionals just starting out in their career or even those who do not have too much disposable money in their hands. Compared to a lump sum investment it is also a low risk investment.
Lump sum or SIP, how to choose?
The amount of money you have to invest, your understanding of market trends, your investment goals and your risk appetite should be the guide to choose between a lump sum or a SIP route.
That said, in times of volatility, lump sum investors may find it difficult to make buy or sell decisions. The risk factor is high in such times and any wrong decision could lead to significant losses to the investor, which is why this is not an advisable investment strategy when the markets are swinging wildly.
When the market is considered to be bottoming out though, investing via a lump sum could yield higher returns. But for this, the investor needs to understand market trends which is not an easy job.
SIPs, on the other hand, are low risk and therefore one can consider investing even in periods when markets are volatile. The SIP investor can enter the market at any time, whether it is doing well or low and since the investment is done at periodic intervals, the average cost of every unit of mutual fund purchased, gets evened out.
The SIP investor also doesn’t have to keep track of all market developments like the lump sum investor needs to. Thus, an SIP is a safer bet.
Salaried professionals tend to prefer SIPs. The interest earned in SIPs is invested back into the fund, leading to compounding of returns.
As you have seen, both the methods of investments therefore have their own pros and cons. Most fund managers however recommend that an investor should have a combination of SIP and lumpsum investment in their portfolio to service their different investment goals.
Download the Upstox App Today