Here’s a solution.
Usually a first time Mutual fund investor is confused with regards to his investment in a fund through the two alternatives available to him i.e.SIP and Lump sum while investing for a long term horizon. Let us understand how these two alternatives work.
SIP: This mode of investment has gained a lot of popularity since last few years because of the various pros it has, neglecting the minor cons. SIP stands for Systematic investment plan which means that an investor will be investing a fixed amount regularly on a monthly investment basis in a particular fund on specific date available, decided by him/ her on a prior note.
The Pros of investing through SIP are discussed below:
- Minimum amount:SIP can be started through a minimum amount of Rs 500.
- ECS:An Electronic Clearing Service process is followed for amount deduction directly through investor’s bank account.
- Rupee cost averaging: It is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more shares of an investment when prices are low and less when they are high.
- Risk Diversification: It can diversify risk through regular monthly investment as you will be participating in all the market cycles (Market highs and lows).
The Cons of investing through SIP are as follows:
- Averaged returns-If you strongly believe (and have some data points) that the market will go up in near future, investing lump sum would be better than SIP, since SIP will average your cost.
- Less control- In a way SIP is a rigid product. You are investing a fixed amount in a fixed Mutual Fund scheme. If you want to change the scheme or the amount, you need to stop the first SIP and start a fresh one.
- Funds Sufficiency – If an investor does not maintain adequate balance in the bank on the day of debit of SIP, then the investment will not happen that month OR the SIP might even get cancelled if this repeats for 3 consecutive months depending on the AMC norms.
LUMP SUM: Lump sum or one-time investment requires investors to invest in the fund at one shot. The number of units that can be bought from lump sum amount on the first day of investment is higher than SIP depending on the amount of investment. This method of investing is usually preferred by aggressive/experienced investors and high net worth individuals.
The Pros of investing through Lumpsummode of investment:
- Investing in Big amounts:This is a good option for investing extra cash on hand instead of keeping it idle.
- NFO’s: New fund offer by a fund is a way of lump sum investment in which an investor invests a bulk amount to deploy his idle capital by investing at NAV of Rs. 10
- Long term outlook:Lump sum investment is well suited for financial goals like a child’s education & marriage, Retirement planning etc. which go over 10-12 years into the future.
The Cons of investing through Lumpsum mode of investment:
- Irregular Investment: Lump sum investment is well suited for financial goals like a child’s education & marriage or others which go over 10-12 years into the future.
- Short term: If the requirement of funds is in the near future, then a lump sum investment may not be the best option as the real returns are derived only over the longer term.
- Risk: The risk associated with the lump sum investment is comparatively higher than SIP as one can end up investing when the markets are quoting at high levels, buying lesser no. of units than compared to market at lows.