Investing in mutual funds is a great investment approach, as it allows you to gain exposure to a number of assets depending on the type of mutual fund it is. There exist many types of mutual funds, such as debt funds that focused on fixed income instruments, equity funds that invest primarily in stocks, and balanced funds that are a mixture of the two. You can invest in mutual funds either through a large one-time payment known as a lump-sum payment, or through an SIP. This article will provide a breakdown of the two types of investment methods, along with the various pros and cons so that potential investors can make better, more informed investment decisions.
Timed Lump Sums.
A lump sum investment is a onetime large sum of money invested in any given mutual fund.
Let’s take for example, an individual who has finally saved up a decent amount of money after retirement or has received the amount from their PF fund, and wishes to invest it in mutual funds. One of the ways they could achieve this, is by investing the whole amount in one mutual fund at one time. This would be known as a lump sum investment.
Why lump sum?
One might be correct to assume that due to the nature of the investment, a lump sum investment in mutual funds would not be the best course of action as it is effectively putting all your eggs in one basket, exposing an individual to significant risk. However, there are two instances wherein a lump-sum is more viable than an SIP.
1. Previous Wealth:
If you have a large capital pool behind you, it is likely that you are less risk-sensitive as others. In this case, a lump-sum investment can be justified, provided of course that the investment has been thoroughly analysed prior to investing.
2. Growing Markets:
If you’ve been tracking a market for a while, and can predict its growth with near certainty, then a lumpsum investment is likely to net you higher absolute over investing small amounts regularly through an SIP which tends to give a weighted average return over the long-run.
A Systematic Investment Plan, or SIP, is, as the name suggests, a plan that focuses on investing a fixed sum of money in mutual funds on a regular basis. The best way to understand this would be to compare it to a lump sum investment.
If an individual possesses a large amount of money, they might choose to make a lump sum investment in a given mutual fund. However, if individuals have does not have a lot of capital, but earns a monthly salary, they can opt to invest a fixed part of that salary each month. In fact, even people with a large sum of money at their disposal may choose to invest it in through SIPs so as to average out the price they are paying.
Additional Read: Understanding the Power of Systematic Investment Plan
There are a number of benefits of employing an SIP over a lump sum investment plan.
1. Lower Risk:
Due to the nature of the investment, the smaller sums of money invested over a long-period of time helps make SIPs less risky that lump-sum investments, while providing average but stable returns over time.
2. Lower-barrier to Entry:
An SIP does not require as keen an eye on and an intricate analysis of the market a lump-sum investment. Given its long-term investment nature, one is unlikely to lose out on all their investment money because put simply, they are not investing all of it at once. An SIP helps even those not particularly in tune with the Securities markets invest comfortably.
3. Ease of Investment:
Due to the above reasons SIPs are perfect for salaried individuals with fixed incomes, and less time to actively stay in touch with the equity and fixed income markets. A great benefit of SIPs is that they can be automated, helping hopeful investors stay disciplined in their investing practice and receive stable but average returns in the long-run.
Additional Read: Why are SIPs an Ideal Choice for the First-time Investor?
Generally, an SIP style of investment is considered safer as one does not make a large expenditure in one go. However, there exist scenarios in which lump sums are the better option as well, especially if one has the money and buffer to do so. This aside, there also exist a number of other factors one should look out for while making a decision between the two such as the state of the market, market timing, whether or not the mutual funds portfolio is debt or equity aligned and whether or not the investor possess the ability to stick to routine payments and has the financial prospects to do so.
If you are looking to invest in any type of mutual fund through either of these methods, the MoneyFy App by Tata Capital helps facilitate your investments in Mutual Funds by allowing to compare various funds, and prepare an investment strategy that suits your financial needs and goals.