Simple as it may seem, there are two approaches commonly adopted by investors – purchasing units by paying a lump sum amount, or investing a fixed amount each month for a pre-determined period, also known as S.I.P – Systematic Investment Plan. If you are new to mutual funds, the concept is broadly like investing via fixed deposit v/s recurring deposit, except that returns vary and are not guaranteed by mutual funds.
So which of the two options should you choose? There is no cast iron rule for this. They are not mutually exclusive, and can co-exist in a portfolio. You can invest a lump sum amount and via SIP – across different funds or even in the same fund. However, to differentiate,
Investing a lump sum amount works best if you
- can spare a reasonable amount of money for a single investment
- may / may not have a specific financial goal other than return on investment
- check the market regularly and can invest similar amounts when there is a dip
whereas investing via SIP is recommended if you
- can spare relatively lesser money every month
- have a specific financial goal in mind (eg. children’s higher studies, marriage after X years)
- do not have the inclination or expertise to time the market
– low entry barrier: most funds accept SIPs of Rs 1,000 per month (some funds even accept Rs 500)
– discipline: by committing yourself to investing a certain amount each month to attain your financial goals
– rupee cost averaging: get more units when market falls, less units when it rises, averaging cost per unit
– no need to remember when to invest: money is automatically debited from your bank on a certain day each month
Remember, there is no definite answer on which method is better and there are no guaranteed returns. Different financial experts will choose one over the other. Ultimately, it depends on market volatility and performance of the fund you invest in, how much you invest, when you start investing and how long you stay invested, allowing your money to compound and grow.
One of the most common reasons for using SIP has been for tax saving funds. As you’re aware, upto 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 on the pocket, and you avoid the last minute rush to invest when your employer asks you to submit proof of tax saving investments 😉
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