There are a plethora of investment products to choose from, and if you are new to investing, you might still be wondering where exactly to put your hard earned money. Well, the answer entirely depends on what type of individual you are and how much risk are you willing to take with your investments. There are some who do not wish to take any risk with their finances and hence settle with traditional investment tools like bank fixed deposits, public provident fund, etc. And then there are those who seek high capital approbation through investments in instruments like mutual funds that offer risk adjusted returns.
If you are someone who wishes higher returns through investments by taking the extra risk, mutual funds might be ideal for you. For those who don’t know, mutual funds are a pool of professionally managed funds that collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy as well as international markets. Mutual funds are considered to have a diversified portfolio as they allocate assets in various money market instruments like equity, debt, treasury bills, corporate bonds, etc.
Those seeking mutual fund investments usually have two investment options; either investing in them via lumpsum payment or SIP. Both lumpsum and SIP are unique in their way and investors, depending on their investment objective and investment horizon should opt for either of the two. But before we understand the difference between SIP and lumpsum, let us understand them in brief.
What is lumpsum?
If you have lumpsum cash parked in your savings account and feel that you can put it to better use, you can invest in mutual funds by making a lumpsum investment. When you invest in mutual funds with a lumpsum, you make the entire payment at the beginning of the investment cycle. This way, you stand a chance of receiving more units depending on the fund’s existing NAV. As the fund continues to make progress and its NAV goes up, your investments benefit as well.
What is SIP?
Systematic Investment Plan or SIP is a systematic approach where one can continue investing in mutual funds until their investment objective is met. SIP is an electronic payment option where all you need to do is instruct your bank and every month on a predetermined date; a fixed amount is debited from your savings account and directed towards your mutual fund.
Difference between SIP and lumpsum investment
|Payment method||Systematic investment method where one can invest regularly in an easy way||A onetime payment made towards mutual fund investments usually at the beginning of the investment cycle|
|Risk||The only risk your investments face is the amount that you invest in mutual funds on a monthly basis||Since you are making the entire payment beforehand, your entire investment amount is exposed to market volatitly|
|Flexibility||SIP investments offer great flexibility and if you want you can change your SIP amount and even skip a particular month’s SIP in case you are out of cash||There is no flexibility here as you already make the payment of your mutual fund investment beforehand|
|Ideal for||SIP is ideal for those who wish to give their investments a systematic approach and want to inculcate the discipline of saving regularly||If you have surplus capital with you and do not mind exposing your entire mutual fund investment market volatility with the hope of fetching higher returns, you can invest in via lumpsum|
Now that you know that difference between SIP and lumpsum investment, how are you planning to invest in mutual funds? No matter how you invest, make sure that you have a defined financial goal and invest within your boundaries. Investing is a long journey and if you wish to be successful, make sure that you remain committed to your investments and do not withdraw them prematurely.