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SIP or lump sum: Which is a better investment mode?

SIP or Lump sum - Which one is better? | Trade Brains

Mutual funds offer excellent flexibility to individuals in terms of a variety of asset classes and modes of mutual fund investment. That being said, the former isn’t that challenging if you carefully assess your financial needs and goals. However, a little overlooked yet equally important aspect of mutual fund investments is choosing the appropriate mode of investment. There are two distinct ways to invest in mutual funds – SIP or Systematic Investment Plan and Lumpsum.

Some questions never die. They keep haunting time to time. One such everlasting issue is SIP vs lumpsum. Which approach is better – investment through SIP or lumpsum? Which will generate higher returns in the future? Let’s understand these two modes of mutual fund investment.

At the outset, there is a difference between the cash flow of the two investment modes. In lump investing, the individual has money on hand to dispense. On the contrary, in the case of SIP investment, the individual might not have money on hand but regular surplus expected in future. Whether one opts for SIP mutual fund or lumpsum depends on whether the person has regular savings or lumpsum amount of liquid money at the moment to invest. You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus. Before you begin wondering how to invest in SIP, let’s understand the benefits of SIP investments over lumpsum

SIP vs Lumpsum

  1. No need to time the market

New investors are often when to enter the market. If you invest a significant amount at a time, there’s a higher probability of losing a substantial portion when the market crashes. However, with SIP investment, your money is spread over time and thus, only a part of your investment will face market volatility and instability.

  1. Rupee cost averaging
    SIP mutual fund permits you to invest at different levels of the stock market cycle. When the market is low, the fund manager ends up buying more units at less price and can sell when the market is at its peak. This reduces the average cost of buying each unit.
  2. Power of compounding
    You must be well-versed with the phrase of investing – ‘The longer you hold, the higher benefits you reap’. SIP helps to accumulate substantial wealth over a period of time. Since your returns further earn returns, your money gets multiplied over some time.
  3. Instils the habit of investing
    Since investing in SIP mutual fund requires an individual to invest a particular amount regularly, it instils a sense of financial discipline and helps you to meet your financial goals.
  4. Easy on your pocket
    SIP investment debunks one of the most common myths prevailing against mutual fund investment – you need an awful lot of money to invest in mutual funds. In fact, you can invest the money as low as Rs. 100 per month.

SIP or lumpsum depends solely on an individual’s personal goals, investment horizon and risk appetite. Whichever investing mode you decide to choose, make sure to run it through with your mutual fund advisor.

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