SIP or a one-time lump sum payment are the two primary ways to invest in mutual funds. The former implies periodic investments of small amounts, while the latter involves investing the entire amount in one go. While both have their pros and cons, not everyone has a large capital base to make a one-time payment. The choice of investment mode, therefore, needs to be based on your payment ability and the benefits of each mode.
So, here’s a look at what you need to know about the two modes to make an informed investment decision.
Benefits of SIP
Investors can make the most of rupee-cost averaging in case they are aiming for a longer investment timeframe. What happens is that you become capable of purchasing multiple units at different price points, which improves the chances of earning profits. This is possible even in a volatile market situation. The investment is spread out over time, while inculcating financial discipline, which is an excellent way to build wealth.
Investors can choose to make payments weekly, monthly, quarterly or yearly. So, the SIP route also gives you flexibility to choose the tenure. Plus, you can set up the automated payments so that you don’t need to worry about due dates and whether regular payments are made.
It is an ideal choice if you do not have a big amount readily available. SIPs are also a good idea to anyone who wishes to play safe. However, make sure to stay invested as long as possible and avoid withdrawing when the market is going downhill. This is because a longer timeframe helps even out losses.
Benefits of Lump Sum
Investors can purchase the units all in one go. This convenient one-time payment is often opted for since it helps create significant liquidity and wealth. However, you need to have substantial capital at hand to do so. Also, make sure you check your risk tolerance. Higher return instruments, like equities, often also come with higher risks. So, if you wish for low equity allocation, you are can invest a lump sum in debt mutual funds.
Factors to Consider Beforehand
Market volatility is one of the most important factors when it comes to picking SIP or lump sum investment in debt mutual funds. For example, when the stock market trends upwards, lump sum could be useful, while SIP will be more beneficial for a longer-term horizon. Further, you should analyze your personal behaviour. Anyone who is lazy about financial commitments might not be able to maintain the regular SIP investment, unless it is automated. Lastly, SIP is a great choice for salaried people, while lump sum might work for self-employed individuals.
For both financial options, you need to be patient through the various market cycles. Further, consider your income and judge your financial situation to make the right choice. There is no one-size-fits-all solution to wealth creation. You need to find what suits you the best.
