SIP or lumpsum payment option which is a better option for investing
Anyone planning to invest their funds in mutual funds has to come face to face with this question at a particular point in time. The routes of the SIP (Systematic Investment Planning) or the lump sum investment has its both pros and cons. Experts feel that you can adopt both directions if you have a disciplined habit of investing and are free of emotional attachment to your investments.
When you make a lumpsum investment, you need to plan for long-term investment and the benefit of increasing compounding is also present. If opted the SIP route, you will be investing in the markets during its higher returns and even in the lower returns period which gives the weighted average yield over a period.
A lump sum investment can be considered when the investor has their retirement fund or their inheritance or any amount earned from the sale of the property. There are quite many reasons to invest lump sum amount, but the route of SIP is typically recommended to investors, even more so in the case of equity mutual fund investment.
When you have a lump sum amount to invest, you can ideally park your fund in liquid funds and can start a Systematic Transfer Plan (STP) over a span of few weeks. This action will help you invest your money entirely and also earn returns from the fund by the reducing balance method. However, when investing through STP, ensure that you have diversified equity portfolio.
When investing vast amounts in one go, you should have answers to these fundamental questions:
- Are you ready to stay invested for an extended period?
- Are your sure of the lump sum amount you need?
- Can you be emotionally detached from the investment in case of market lows?
If you are having a fair idea of answers to these questions, you can move forward with your investment. If not, you can go for the SIP method which has the following advantages:
- You do not need to worry about the market behavior:
When investing through SIP, you keep investing in your fund irrespective of the market trend, and the primary factor of SIP is that you should not stop investing even if the market falls, this habit helps you limit losses, and also some of the investment will be in high at a certain point. However, in a lump sum the return is higher, and at the same time, you stand the risk of higher loss.
- Cost averaging benefit:
A SIP investment allows you to invest in all market levels. So, when the market is expensive, there will be fewer units to purchase, and when the market is low, you can buy more units. This averages your buying power and helps you to increase your gains.
- Builds a disciplined habit:
If you are a salaried person, you will develop a practice of investing regularly at the start of the month. This helps you to be responsible for funding and spending your hard-earned money in proper channels. As you plan your monthly budget for spending, it is good to prepare a monthly budget for financial investing.
- Ease of investment:
When investing through SIP, you get the ease of investing at your comfort and pace. Not all investors have ready cash to invest in at one go. Through SIP, you can invest a small portion of your salary in the fund at the start of every month and be assured that there would be good returns in the future. Regular savings even in small amounts can help you create a significant corpus amount in the long run. You can plan and achieve your financial goals through this easy method without the pressure of lump sum investment and the risk factor that is involved when you invest a considerable amount.
- No lock-in period and has auto debit feature:
While investing through SIP, there is no lock-in period, and you can withdraw at any time if you are invested in an open-ended equity fund scheme, and you have the feature of auto debit, where the amount is automatically transferred from your bank account to the fund every month at a date you fix.
Investing in Lump sum amount puts your amount to work immediately whereas in SIP you get the habit of investing regularly. Even though the lump sum route of investing looks favorable, it is best to opt for the SIP route as there are more advantages. However, you want to invest in a lump sum, then park your funds in a liquid fund and do an STP regularly to different equities to safeguard yourself from a loss that arrives from investing in a single equity fund. You also earn a better rate of interest than letting your money lie idle in a bank account.
So, ultimately the option of investing rests within the investor and if still in doubt, consult our Wealthapp experts to decide your investment route.