Investing money and making a profit on it is a job that revolves around how one makes a decision. From understanding the basics of the product/policy to choosing or budget availability becomes crucial. Even the payment methods play a crucial role in your financial planning.
Systematic investment plan (SIP) is one such method that has become popular among the investors, especially young early-stage private investors, who want to secure their retirement or have goals like owning a house or getting a higher education.
Not just SIPs, another common method is ‘flat rate’. Mutual fund investors encounter this choice-cum-confusion when they initiate an investment plan.
Both methods are useful in different situations for investors. Factors such as the type of fund, the amount to be invested and the prevailing market conditions can determine your approach to how you invest the money.
SIP or lump sum investments in mutual funds come in handy in a variety of situations. Basically, depending on your wallet, choose to invest through a SIP or a lump sum.
What is the difference between SIP and lump sum?
A lump sum is a one-time investment by a fund purchaser when a substantial amount of money is available.
A one-time investment is the entire amount in one go. For example, when one receives a windfall in the form of a bonus, leave money or otherwise.
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In SIP, you can invest in Mutual Funds in a diversified manner, investing a small amount regularly, for example starting from Rs 500 monthly. SIP is gaining popularity among Indian investors as it helps in Rupee Cost Averaging and also in investing in a disciplined manner without you worrying about market volatility and market timing.
Rahul Jain, president and head of Nuvama Wealth (formerly known as Edelweiss Securities), said: “SIP is an easy and effective investment method to create wealth using equity funds. At a certain date, money is automatically invested in a fund without human intervention, eliminating the ‘noise’ and the role of fear in investment, the biggest barrier to wealth creation.”
However, selecting an investment route should depend on your short-term and long-term goals. Crucial factors such as monthly income, financial stability, investment goals and risk appetite must be considered before opting for a mutual fund.
It should be noted that the return on investment, be it a lump sum or SIP, depends on market conditions. If markets recover, a one-time investment could be more profitable, with the benefit of compound interest. On the other hand, if the trend is bearish or volatile, SIPs with their rupee cost average can be more beneficial.
However, investors should understand that markets are unpredictable, no one can say when it will go up or down or when a bullish or bearish cycle will start or end.
It cannot be said that investments can give a higher return than SIP in one go or vice versa. That’s why it’s important to build a well-diversified portfolio that aligns with your objectives and risk appetite.
Rise of SIPs
SIPs have seen growth in terms of their adoption as a long-term wealth creation tool.
“Left to themselves, investors try to time the market to perfection, thereby missing out on investment opportunities. Investors should plan long-term goals with SIPs and keep going until the goal is reached,” said Jain.
According to the Association of Mutual Funds in India, as of December 2022, SIP accounts of mutual funds amounted to 6.12 crore and the total amount collected through SIP in December 2022 was Rs 13,573 crore.
The current inflow rate is expected to continue into 2023, with experts suggesting that monthly SIPs average around Rs 14,000 crore.
Investors should note that investment funds are subject to market risks and are advised to carefully read all scheme-related documents before investing.
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