Planning to invest for a safe and happy future, then prefer looking at a few pointers wherein you can think about taking the best pick for your investment. The real question – What type of investment to choose- Sip vs lump sum mutual funds investment?
- For salaried investor, SIP investment is a better option because of her regular cash flow. SIP is known as the discipline of regular investing and can be used for long-term (5 years or more will give you better returns). Still, if you are looking for lumpsum, prefer opting the time when you get money in the form of bonus/increment.
- If you are new to the world of investment and interested in equities, prefer going for SIP route. Being new to this, you might fall into the increase and decrease of market volatilities, thus causing jitters. So, SIP it is.
- If you are investing for short-term, let’s say for 3 years for buying a car, then you can go for lumpsum investment in mutual funds, thus giving better returns than SIP.
How SIP & Lumpsum Investment Work in Mutual Funds
Investing in SIP is an easy way for your monthly/quarterly investment. There are two key mechanisms behind the working of SIP.
Compounding Effect or Effect of compounding:
The effect of compounding holds a lot of value, especially in the investing domain. Compared to simple interest, the return investor earns from compounding grow at a geometric rate instead of arithmetic rate. It leads to an exponential growth of money. The value of SIP investment increases as investing time increases.
Rupee cost averaging
Rupee cost averaging gives an extra edge to the investor. It helps them buying more units when the market is down and less units when the market is high.
Lumpsum investment in mutual funds
Lumpsum investment in Mutual Funds is a ONE-TIME Investment of a particular amount in the selected fund chosen by the investor. It can be funds in the debt category or equity category, based on what the goals/expected returns of the investor are.
If you invest a lumpsum amount in a fund of the ‘EQUITY’ Category, make sure the investment is for a long-period of time like 5 years or more and in case of ‘DEBT’ funds, it can be for a short span of time, clearly depending on the goals.
Pros & Cons of SIP & Lumpsum Investment
Frequently Asked Questions