SIP vs Lumpsum. SIP vs Mutual Fund. Which is better and when to choose what?
We all have been hearing this question for a long time now. It isn’t easy to pick one. Each one has its own benefits. The main difference between a SIP and mutual fund (lump sum) is the cash flows. One invests only once in a lump sum investment and in SIP he/she invests regularly. There is no rule that a person investing through SIP can’t do a lump sum when there are surplus funds available.
It is always advisable to invest through SIP as it inculcates financial discipline. But then there are debt funds where SIP is not suitable. Sounds confusing right? Well, it isn’t. Read on know when is SIP investing recommended and when lumpsum is recommended.
When is SIP suitable?
Systematic Investment Plan (SIP) is an investment option available for mutual fund investors. Investors can invest a fixed sum on a regular basis. SIP investing has multiple benefits.
Rupee cost averaging: Since the investment is spread over a period of time, the average cost of investing comes down.
Bring Discipline into investing: Since the SIP amount is deducted automatically from your bank account every month, SIP brings out the much-required discipline in investing.
Prevent the problem of Market Timing: Since SIP gets you more units when markets are down, they lower the average cost of investing. This brings higher returns in the long term.
Flexibility: You can stop, pause, change the amount and withdraw any amount from a SIP.
But when and who should choose to invest through a SIP?
A regular income person can choose to invest in SIP. This reduces the burden to invest a lump sum amount at once. For a person investing in equity funds and looking for a long-term investment, SIP is highly recommended. Also, SIP investing works well in a falling market. This is because the investor can accumulate a large number of units when the price is low. The returns will be high once the markets pick up the pace.
The main question is when is the right time to choose a SIP. Well anytime is the right time. Let the market be at an all-time high or low, it shouldn’t affect SIP investors. This is because it assumed that SIP investors invest for a long time (5-6 years minimum). It is always recommended to invest through SIP for a long-term as investing throughout an entire business cycle is beneficial for the investors and they can reap high benefits.
When is lumpsum suitable?
Lumpsum investing suits investors who want to invest for a short-term in debt mutual funds. There is no point in investing debt mutual funds through SIP. Rather a lumpsum route should be used to invest in debt mutual funds as the recommended horizon for debt funds is less than 3 years.
So does that mean one cannot invest in equity funds through lump sum? Well, certainly not. One can invest in equity mutual funds through lumpsum investment. Any form of windfall gains, profit from the sale of an asset or any surplus cash available can be invested in the market to earn a return on them. Even salaried individuals can invest through lumpsum when they get a year-end bonus or festival bonus.
When to choose lump sum investment?
But it gets difficult to time the market. One can invest through lump sum when they are sure that the market is going to increase. A lumpsum investing best works in an increasing market. But what if they are wrong and the market falls? Well there is a way out for this. One can always opt for STP (Systematic Transfer Plan). An STP is a regular transfer of money from another fund instead of your bank account. Instead of keeping the money in a bank you invest in a debt fund which has the potential to earn higher returns than a savings bank account. Chose a short-term fund debt fund and equity fund to do a STP within the same fund house. Then you can instruct the fund house to do a STP into an equity fund of your choice over a period of time. Read more about STP here.
It can never be SIP vs. Lumpsum. There is always an ‘and’ in between them as they go hand in hand. An investor cannot alone choose one type of investing option. SIP and lumpsum investing have their own benefits and work for different investors at different times. Pick an investment option based on your situation and voila you are earning returns on your investment!
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