Perhaps, one of the biggest dilemmas at the time of investing in a mutual fund is how to choose the mode of investment. Whether to go for a lump sum investment in one shot or go for monthly Systematic Investment Plans popularly known as SIPs. The concept of SIP was introduced in India by Franklin Templeton Mutual Fund more than 17 years ago. And since then there has been a constant comparison between these two modes of investment.
Honestly, a systematic investment plan is one of the easiest and simplest ways of investing in mutual funds as they work on the principle of regular periodic investments thus inculcating the habit of savings effortlessly. Apart from this, there are several other advantages of making investments through SIPs.
Here are some of the reasons why you must consider SIP as your ideal mode of investment:
A disciplined approach in investing- If you wish to create a huge corpus for yourself to meet your financial goals on time, then it is very important that you follow a disciplined approach to your investments. Many times, in order to make a lump sum investment you keep postponing your decision to invest. SIPs, on the other hand, can be started with a minimal amount without making any significant dent in your monthly income.
Rupee Cost Averaging- Rupee cost averaging is a technique followed by investors in the stock market of buying stocks at regular intervals so as to lower the risk associated with their investment. An investor can buy more units when the price is low and will be able to buy only fewer units when the price is high, but with time this strategy ensures that the average cost of the investment is low. Similarly, investing through SIPs, helps investors to average out the purchase price of units in the mutual fund’s scheme as it would invest in all phases of the market.
An advantage to starting early- Starting your investments early in life is extremely important as the power of compounding works wonders on your investment. As an investor can start a SIP with a minimal amount of Rs. 500, one can start with a small amount of SIP in the initial years of their career and eventually increase their investments as their income grows. Thus, if you start investing as soon as you start earning, then those initial investments give skyrocketing returns over the years due to the compounding effect.
Convenience– Investing in SIP is extremely convenient. Once you have opted for SIP mode, the SIP amount is auto-debited from your account via ECS every month. Though the minimum tenure for investment through SIP is 6 months, it can be extended up to any number of years by an investor.
Making your investments in mutual funds through SIPs has several advantages and is a great way to start investing in mutual funds. However, there are many of you who not have a fixed regular income or are looking to invest a windfall gain and hence find it convenient to invest a lump sum. If the investment horizon is ten years or more, then even lump sum investment can be made as in the long run equity funds have never given negative returns.
Another option is that you can opt for a Systematic Transfer Plan or STP. STP is basically a variant of SIP. You can invest the lump sum in a debt fund without any exit load and then opt for an STP into an equity scheme for the desired investment tenure. The fund manager would automatically transfer funds from your debt investment as a SIP into the equity scheme, thus protecting your investments in volatile markets.
In the long run, the returns generated by equity markets have outperformed the returns generated by all the other assets and so your investments whether lump sum or SIPs would fetch you good returns. However, in the short-run, the markets tend to be volatile and it is very difficult to predict and time the market, investing through SIPs in the equities at regular intervals, helps lower the risk of your investment, by bringing down the average cost of your investment in all market conditions.