Why do people prefer SIP over Lumpsum
Many budding investors believe the only reason for adopting the Systematic Investment Plan (SIP) route is the lack of substantial funds. Howeve, this is not the case. Experts suggest that in spite of significant funds, it can be beneficial to invest in a debt fund and move to an equity fund through a SIP. By doing so, your corpus can earn higher returns compared to a savings bank account and also allow for systematic investment.
Below, we list a few compelling reasons why SIP is a preferred method over lump sum investments.
How to invest in mutual funds
There are two ways to invest in mutual funds, typically, in equity mutual fund schemes. You can either start an SIP or invest in a lumpsum. Depending on your risk profile, current income, expenditures and financial goals you can choose either.
Lump sum investment
This is a one-time investment option when you have a significant disposable amount in hand. If you have a high-risk tolerance, you can opt for a lump sum investment. For instance, if you are investing Rs. 5 lakhs in an equity mutual fund scheme, it can be a lump sum investment.
SIP is an investment plan where you invest a fixed amount of money in a mutual fund. This can be done on a monthly, quarterly or semi-annual basis. For instance, investing Rs. 10,000 per month can be a SIP investment.
SIP vs Lumpsum
Most investors are often puzzled on the right mode of investing. Are lump sum amounts a better option? Or does it make better sens to opt for a SIP? Here, we look at the SIP vs lumpsum debate and tell you why SIP trumps over the other:
No need to monitor the market
Mutual fund investors who are new to the market are often confused about the best time to enter the market. You may gain significantly during a market high. But if you invest a substantial amount in one go, you could lose out a significant portion of your investment in the event of a market crash. When you invest through SIP, only parts of your entire investment face the market ups and downs. This is because your money is spread over time.
- Rupee cost averaging
When you invest periodically through SIP, some of your investments may be at a lower Net Asset Value (NAV) while some could go higher. The fund value falls when the NAV is low, but you can get more units at a low price.
On the contrary, when the NAV is high, the fund value rises, but as the price is high, you receive a lower number of units. Overall, this makes the average cost of your investments reasonable. You may accumulate more units through SIP than lumpsum investments. This concept is known as ‘rupee cost averaging’.
- Builds the habit of investing
Since SIP allows you to invest a fixed sum at fixed intervals, it instils a habit of saving. It is a planned way of investing that can help you accomplish wealth creation.
- Ideal for new investors
If you are new to the mutual fund market, you can begin your investment journey with a SIP. Over time, you can gradually build your knowledge on equities and invest a nominal amount. With some experience at hand, you can venture into riskier but potent equity schemes based on your investment needs.
- Better past performance
SIP investments have consistently earned higher returns in the long run as opposed to lumpsum investments because of rupee cost averaging.
SIP allows you to invest a fixed amount at regular intervals. Besides the power of compounding, it also provides the advantage of investing at an average price over a period. Hence, SIP makes better sense over a lump sum investment for equities, especially since NAVs constantly fluctuate.