What is a mutual fund?
Mutual funds are professionally managed fund that pools investment from various investors to invest in differentsecurities.When it comes to investing in mutual funds, individuals are offered two options – Systematic Investment Plan or SIP and Lumpsum mode. Investors are often confused about which way to go about while investing in mutual funds online or the traditional offline way. Let’s understand these two modes in detail:
What is SIP?
Under the SIP mode, the investor invests a specific amount of money at regular intervals in their desired fund. Under this disciplined form of investing, automatic regular investments are made against a particular mutual fund scheme. It is usually recommended when the Net Asset Value (NAV) of the fund is continuously falling.Also, you should not invest in SIP if you have uncertain future income or earnings.
What is Lumpsum?
Under the lumpsum investment, you invest the entire investment amount in one go. This method is often chosen to build extra wealth and liquidity. Unlike SIP investment, this method requires the investor to time the market. It is usually recommended when the markets are continuously growing.
Let’s understand these concepts better with the help of an example better. Imagine there are two diverse cricket teams – Team A and Team B, playing a one-day match. Team A has batsmen who prefer to accumulate runs steadily in singles and twos. While Team B’s players try to score the maximum quickly. Team A’s approach would be less risky and they would often make a reasonably decent total, even on a bad pitch. On the other hand, the attacker or Team B’s strategy is highly risky. On a good wicket, they might easily outscore their opponents. But on a bad day, they could collapse and lose the plot.
In the investment world, the accumulator’s or Team A’s approach is akinto an SIP investment. While Team B’s strategy is similar to lumpsum investment.
|Parameter||SIP investment||Lumpsum Investment|
|Cash flow||Regular||One time|
|Flexibility of investment||High||Low|
|Horizon||Ideal for long-term||Ideal for short-term|
|Risk profile||Low to moderate||Moderate to High|
|Time of investment||Quite immune to the volatility of the market||Matters a lot as lumpsum investments are subject to market risk|
Lumpsum or SIP?
The answer to this question is dependent on what suits you best. If you have a sizeable sum of money at your disposal and you wish to earn reasonable returns in the short run, investing via lumpsum could work in your favour. However, investing via SIP has its own benefits. SIP offers the benefits of financial discipline, the power of compounding, rupee cost averaging, and is also easy on your pockets.No matter which mode of investment you choose, you’ll be able to reap all the benefits of mutual fund either way. Always align your mutual fund investments to your financial goals, risk profile and investment horizon. Happy investing!