Should I opt for SIP or bulk investment?
The investment can be made in a mutual fund in two ways.
The basic principle is that if you can invest a small but regular amount
Apart from selecting schemes to invest in, it is always your choice as to how you will invest in mutual funds. The investment can be made in a mutual fund in two ways. One is investing a bulk amount, and another is via a systematic investment plan (SIP). Primarily, the difference between SIP and lump sum methods is the frequency of investment.
The bulk or lump sum investment means a single payment mode or one-time payment, and under the SIP mode of investing, a fixed amount is invested at fixed intervals of time. It can be made daily, monthly, quarterly, or half-yearly in the mutual fund scheme of your choice. Here the minimum investment amount also varies.
Both SIP and lump sum investments in mutual funds allow investors to benefit from potential wealth creation. However, the mode of investment you choose can make a difference in the investment portfolio. Here’s a useful brief on both investment routes.
SIP or Bulk investment? Which one should you opt for?
It all depends on the conditions of the stock market. The lump sum mode of mutual fund investment tends to give relatively higher returns during upward trends. In contrast, SIP purchases generally provide better returns during falling markets than a lump sum investment.
Factors to Consider Before Investing
The basic principle is that if you can invest a small but regular amount of money (e.g., a salaried person trying to inculcate a savings habit) for investment, SIPs can be a more suitable investment option for you. Lump sum investments may be more beneficial if you have a bulk amount to invest and have a relatively high-risk tolerance.
When the market is low, the lump sum investment will generate higher returns. If you are not knowledgeable about identifying cycles, a SIP is better as it will help distribute the risk.
Market volatility plays a massive role in generating returns for equity funds. At the same time, debt funds are less affected by market trends and likely to generate almost similar returns for the lump sum and SIP investments.
Advantages of SIP over Bulk Investment
Most investors prefer periodic investments or SIP because of the following benefits of SIPs offer over lump sum investments.
In bulk investment, when markets are up, your money would buy fewer units of the mutual fund and more units when they are down.
Usually, SIP funds purchased overtime during different market cycles, including both rising and falling markets. Therefore there is scope for compensating purchases made during a market-high with more units of a fund purchased during a market-low. The cost per unit is averaged out over the overall investment horizon. It can help reduce the risk of market fluctuations and even out the price. Units can also be sold when the market is performing well. This is called averaging rupee-cost.
Power of Compounding
The power of compounding helps you to earn greater returns. Through SIP, your investment amount regularly increases by a fixed amount. As the interest earned on SIP investments are reinvested in the scheme. You get the benefit of compounding by earning returns on the returns generated by your investment.
SIPs can be started with as little as INR 500 per month. On the other hand, for lump sum investments, you have to make arrangements for an amount in bulk, and that is always more than the amount you invest in SIP.
Close Monitoring of Market
Lump sum investments are most beneficial when you invest during a market low. Investors need to watch market movements closely since lump sum investments are a bulk commitment. However, inexperienced investors are often not sure of when to enter the market. When you invest a significant amount, there is always a risk of losing out a substantial portion when the market crashes.
With SIPs, you may enter during any market cycles and that doesn’t require close monitoring of market movements. As your money is spread over time, only some part of your entire investment will face the market volatility.
Markets can be highly volatile sometimes. If you have made a lump sum investment, you may have to withdraw your money in a panic. At the same time, the effect of market volatility is less intense when you choose a SIP mode because your money is spread out over time. Unlike a lump sum investment, investors need not take stress in SIP investment and may stay invested.
SIPs grow the habit of timely saving regularly and make you financially disciplined.
It requires an investor to put away a fixed sum periodically. You can also set up an automatic investment instruction with banks that allows an auto deduction from the account at a frequency of your choice.
Better Past Performance
SIP investments have consistently earned higher long-term returns for investments made for more than 5 years compared to lump sum investments.
Advantages of Bulk Investment over SIP
The bulk investment with a long-term investment horizon minimum of seven to ten years can give considerable returns.
The Benefit of Market Lows
As an investor, if you can recognize market cycles and invest a lump sum amount in a mutual fund during a market low, that investment can get you high returns. Here applies the basic principle of investing, buying low and selling high.
It requires a one-time payment only. It is convenient—no burden of regular deduction of amount for an extended period.
Long-Term Financial Goals
Bulk investment can help achieve your specific financial goals, like investing for a child’s education fund or a retirement fund.
The bottom line is that choosing a SIP over a lump sum investment depends on your requirements and other factors such as income stability, investment goals, and risk capacity. Remember, an ill-timed investment could result in losses, and you may lose confidence to pump in money again. That said, experts prefer SIPs on two counts. First, to tide over market fluctuations, and second, it is a good investment option for novice investors who lack knowledge of market playing factors. Therefore consult your financial advisor to choose the best mode of investment suitable for you. Some form of investment is always better than none.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.