A question that keeps coming up in your mind as an Investor is – “Whether I should invest a lumpsum amount or go for SIP i.e. Systematic Investment Plan”.
Let’s understand how both works and what could be best for you. Let’s go straight into the Video.
One of the biggest advantages of investing the SIP way is that it gets you into the habit of saving frequently. Banks allow you to set up an automatic investment instruction at a frequency of your choice. Through the SIP mode, you can invest as little as ₹500 in a mutual fund scheme, depending on a pre-specified interval.
In SIP since you make the purchases during different market cycles, the cost per unit is averaged out over the overall investment horizon. The Cost of the Rupee too is averaged when investing via SIP. More number of units are purchased during a market low, compensating for purchases made during a market high. This can help tide over market fluctuations and even out the cost.
Lump sum investment can be suitable for you, if you prefer to invest over a long-term period of 10 years or more. Lump-sum investments are most beneficial when you invest during a market low. In the Lumpsum method, You invest everything in one shot. You are covered if you happen to buy when markets are down. But if the markets are high, you might end up losing money.
In a practical and realistic sense, there is a world of difference between the two when it comes to implementation. The money automatically gets invested in a mutual fund scheme every month through an SIP, because of the standing instructions you give to your Bank, but, you have to take the time and invest the money yourself in the Lumpsum method.
The question is, are you disciplined enough to do it without fail month after month? Are you sure you would make the investment, irrespective of the market conditions?
Many studies have found out that very few investors can actually do it. Market conditions and spending habits have a huge impact on investments. Some investors overshoot their budget and fail to invest. Some investors get scared by the market and postpone their investment. An SIP helps investors avoid such traps.
The types of return that you need to understand before making a Lumpsum Investment are:
- Absolute Return
- Total Return
- Annualized Return
- Point to point Return
- Trailing Return
- Rolling Return
SIP and lump sum investment both have their benefits. The selection depends upon what suits you better. While SIPs are more pocket-friendly and more comfortable to begin, the lumpsum investment can generate higher returns, especially in bull markets. But do note that making the best use of lumpsum investment requires significant knowledge and experience. We hope you have learned something new today, as it is our constant endeavour at Motilal Oswal to educate and make our investor a sound investor. Happy investing!