When it comes to investing, there are many options to choose from. One of the most popular choices is mutual funds. There are two methods of investing in mutual funds- SIP and lump sum. This blog post will discuss the differences between these two methods.
Let’s get started.
What is SIP?
SIP stands for systematic investment plan. It is an investing technique whereby investors invest a fixed sum of money at regular intervals in a mutual fund scheme.
The main advantage of SIP investments is that it helps to average out the cost of investment, thereby reducing the risk associated with timing the market. SIP also instills discipline in investors as they must commit to investing a fixed sum of money at regular intervals.
What is the Lump Sum Method?
The lump sum method is where you invest the entire amount in one instalment. The main advantage of lump sum investment is that it allows you to get more units for your investment compared to a systematic investment plan (SIP). However, this also means that you are exposed to more risk as the markets may fall after you have made your investment.
SIP Vs. Lump Sum
- The Investment Amount
In the case of SIP, an investor needs to invest a fixed sum regularly (weekly, monthly, etc.), whereas, in a lump sum investment, the entire amount is invested in one go.
SIP offers flexibility as you can choose the day of the month on which your investment will be made. This is very important as it helps to ensure that your investment is made at a time that is convenient for you.
On the other hand, a lump sum investment requires you to make a one-time investment. This can be difficult if you have other financial commitments that take up your time and money.
- Market Volatility
In terms of market volatility, SIP is a better option than a lump sum. This is because you buy units at different prices when you invest through SIP. So, even if the market falls sharply, your average investment cost would be lower than that of a lump sum.
On the other hand, in lump sum investment, you buy all the units at one go. So, you will lose if the market falls sharply after your investment. Hence, from the perspective of market volatility, SIP is a better option than lump sum investing in mutual funds.
- Financial Discipline
Financial discipline is critical for long-term success regardless of which investment route you choose. SIP helps inculcate this habit as it makes you invest a fixed sum regularly.
Lump sum investing requires you to have the discipline to save up a large amount of money before investing. This can be difficult for some people.
The Bottom Line
SIP is a great way to start investing in mutual funds, especially if you are new to the game. It allows you to invest small amounts of money over time, which can compound and grow into a larger sum. However, lump sum investing may be a better choice if you have a large sum of money you want to invest all at once. Ultimately, it is crucial to research and determine what investment strategy is best for you and your goals.