The concepts of Systematic Investment Plans (SIPs) and lump sum (one-time) investment are two excellent methods of investing.
SIP investments are a disciplined form of investing where you will have to save every month. The deductions are made automatically from your bank account into the chosen mutual fund investment, on a specific date and for a specific period. In this method of investing, you get a weighted average return over a period of time.
For example, if you decide to do a monthly SIP of Rs. 10,000, then on a specified date, say, 5th or 10th of every month, you will invest Rs.10, 000. Every month the net asset value (NAV) of the fund will change as per the fund’s performance. SIPs basically are an excellent vehicle for an investor to invest on a regular basis.
A lump sum investment is done when the entire amount is invested at one go into a particular equity mutual fund. Lump sum investments are mostly done by those investors who have a better understanding of the equity market and current valuations.
The one time investment looks really attractive and would certainly yield better returns (depending on market situation) when compared to SIP. But the real question is how many of us would have that required amount to invest at one time keeping financial goals in mind.
For example, if you are looking to build up Rs. 3 Crs for retirement over next 30 years, a onetime investment of Rs.10 Lakhs today have to be invested in an equity mutual fund and let’s say at an assumed rate of 12%. But the question is do you have Rs. 10 Lakhs to set aside for retirement today?
As such a smaller sum of money getting invested on a regular basis helps to build wealth without cutting deep inside the pocket of an investor. At the same time, a SIP of Rs. 10000 a month could help you in accumulating around Rs 3 Crore by the end of 30 years.
SIP follows “Save first, spend later” mantra, as you invest the same amount at regular intervals, through an automated withdrawal system from your bank account. This reduces the pressure to invest your remaining disposable income after spending your salary on necessities. SIPs have brought mutual funds within the reach of ordinary people as it enables to invest even Rs.500 or Rs. 1000 a month or any amount they would like to invest.
SIP can be any amount you choose that works for you – Rs 3,000 a month or Rs 3 lakh a month. If you have a target in mind you want to earn over time, you can allocate appropriately, rather than making another lump sum investment later to meet that goal.
Because you are investing in mutual funds at regular intervals, it means you are in the market whether it’s up or down. By staggering your investments over a period of time, you mitigate the risk of losing a large amount of money during a downturn.
One of the most common reasons for using SIP has been for tax saving funds. As you are aware, up to Rs 1.5 lakh per year is eligible for tax deduction under Section 80C. Investing a lump sum may not be a practical solution for everyone, but investing Rs 10,000- Rs 12,000 per month is much easier. You don’t need to watch the share market constantly and market ups and downs will not bother you much, as it averages your investments.
But yes, if you are a keen market watcher and have a passion for tracking individual indices and funds, then lump sum investments may make sense for you. Timing the market is a tough challenge, unless you are comfortable with the risk level and can dedicate time to watch over the market movement.
There is no right or wrong way to invest in capital markets. Not investing at all would be the worst decision you could make as you would be missing out on growing your wealth for the future. When it comes to using the lump sum or SIP approach, look at your cash flow needs, appetite for risk, financial goals and knowledge of markets before determining the best method for you.