Many people think that doing investment is a challenging job as it requires a lot of hard work, patience and a little bit of research. This can be true to some extent but not fully. Investments can give you outstanding results if done properly.
Make sure that all the investment that you have made or will make should be under control with your investment profile that includes income, expenditure risk profile and financial goals.
You can select an investment option that depends on your affordability such as lump sum amount or SIP.
The investment mode can make a difference in one’s portfolio. To learn more, let’s understand the difference between the duo.
Understanding SIP and Lump Sum Amount
SIP and lump sum investment allow investors to benefit from huge wealth creation. However, the primary difference between lump sum and SIP is the frequency of investment.
SIP refers to the Systematic Investment Plan that allows you to invest a fixed amount periodically.
Many schemes declared the minimum SIP amount is ₹500. Investors are required to submit the NACH mandate at the starting of SIP that enables the fund houses to debit the SIP amount from the bank account of the investors on a fixed date every month.
With a lump sum option, investors are required to invest a lump sum amount in a mutual fund scheme depending completely on their choice.
You are free to select any amount and then withdraw the same anytime if you have invested in an open-ended scheme. However, ELSS has a lock-in period.
When Should Choose to Select To Invest Through SIP
A regular income person always prefers SIP over Lumpsum in SIP. But why is SIP better? This eliminates the burden to invest a huge amount at once. A salaried person who invests in equity funds and seeking long-term investment, SIP is highly recommended.
Also, investing in SIP always works when the market falls. It happens because investors can accumulate a large number of mutual fund units when the price is low.
If we break down the monthly SIP of ₹5,000/month in the same returns for the five years, you will receive a return that would be close to ₹4,10,000 at the end of 5 years.
Comparison of Lumpsum and SIP Investment
1. Investors Don’t Necessarily Require to Monitor the Market Closely
Lump-sum investments mean bulk commitments that investors must have known when they enter the stock market. It is suggested to do investment in lumpsum investment only if you invest when the stock market is low.
In the case of SIP, you can enter the market during different stock market cycles. Investors don’t require to watch market movements as closely as they would for lump sum investments.
2. Low Investment Requirements
You can begin investments with as little as ₹500 per month. However, lump-sum investments require at least ₹1000 although mutual funds in India set a lower limit as ₹5000. To calculate the estimated returns, investors can use SIP calculators.
3. Power of Compounding
SIP works on the power of compounding. In this, the interest earned on SIP investments is reinvested in the scheme.
4. Averaged Costs
As SIP leads to mutual fund purchases during different market cycles, the cost per unit is averaged out over the overall investment horizon.
More 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. Units can then be sold when the market is performing well.
5. Inculcate Financial Discipline
SIPs improve your financial discipline as it automatically puts you in the habit of saving frequently.
Crucial Factors to Consider Before Investing
The following factors help you to identify the right investment route:
If you have a huge amount in your bank, a lump sum investment may be a good strategy for you as it saves you from spending a huge amount of money. If you are a salaried person, then SIP would be a good option for you.
2. Market Timing
When a stock market becomes low, lump-sum investments will generate high returns. If you are not comfortable with the stock market cycle, SIP will help you as it can minimize your market risks.
3. Fund Type
Market volatility plays a crucial role when it comes to stock market returns. In the case of equity funds, market volatility highly matters. Debt funds are less affected by the market trends and give higher returns for SIP and lump sum investments.
Benefits of SIP
SIP helps you to start your investment with a minimum amount of ₹500.
SIP helps you to maintain disciplined investing as with SIP
Power of Rupee Cost Averaging
Rupee Cost Averaging helps in reducing the average price of the purchased units.
SIPs minimize the requirement for you to time the market. You can invest a fixed amount every month throughout the life cycle.
Benefits of Lump Sum Investments
Power of Compounding
If you make a lump sum investment of ₹3,00,000 in an equity fund for 5 years that gives 12% returns per year, the estimated returns would be around ₹5,25,000.
Better Control on Investments
Lump-sum investments allow you to switch between the schemes that are based on the market conditions and you can earn higher returns. However, this requires considerable investment experience.
Investment via SIP or Lumpsum always offers you better returns than other investment types. If you are a beginner who wants to start investing with less risk, always go for SIP as it may provide you with good returns. Also, with SIP you get the returns that are heavily based on compounding effects.