Should you make a lump sum investment in mutual funds or start a SIP?
Mutual funds are an investment vehicle that gives investors to explore various markets and asset classes through one single investment. One mutual fund unit consists of several stocks and other components, making it one of the most diversified investment avenues of the current times. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. In which asset class and in how much proportion a mutual fund will invest will entirely depend on the nature of the scheme and the risk profile that it carries.
For example, a taxed fund like ELSS predominantly invests in equity and equity related investments and is considered to carry a diversified portfolio. Similarly, a conservative hybrid which is balanced in nature invests both in equity and debt related instruments. But since it is conservative in nature, this fund invests more in debt securities than less in equity related instruments.
Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing net asset value (NAV). The performance of a mutual fund may depend on the performance of its underlying assets and the number of sectors and industries it invests in.
Those seeking investments in mutual funds have two options to make investment – they can either make a lump sum investment or they can start a mutual fund SIP. A lump sum investment is generally considered by those investors who have lump sum cash parked and wish to put it to better use. Investors who make a lump sum investment in mutual funds are allotted units in large numbers depending on the investment amount.
A Systematic Investment Plan on the other hand is an easy and convenient way to invest in mutual funds. One does not need to have a surplus capital at their disposal to make an investment in mutual funds via SIP. With SIP, all you need to do is complete a one time mandate with their bank. After this, investors can invest a fixed amount every month in a particular mutual fund scheme of their choice. Every month on a fixed date, a predetermined amount is debited from their savings account and electronically transferred to the mutual fund.
In case investors do not know how much money they should invest regularly to get closer to their ultimate financial goal, they can take the help of an online SIP return calculator. A SIP return calculator is an online tool that gives investors an estimate of the capital gains they might receive on their mutual fund investments made via a Systematic Investment Plan.
The reason you should consider starting an SIP in mutual funds instead of making a lump sum is because SIP investments have their own benefits. Investors can invest a small amount that they are comfortable with in a mutual fund SIP. But this amount should not be less than the minimum investment amount mentioned in the offer document. Also, SIP allows investments to benefit from the power of compounding. Compounding in mutual funds refers to the interest that an investment earns on in the initial investment amount. This interest is reinvested in the scheme and continues to accrue interest, thus leading the initial investment to multiply in the long run.
SIP also allows an investor’s finances to benefit from rupee cost averaging. When the NAV of a fund is low, more units are allotted to the investor’s portfolio. Similarly, when the NAV of a fund is high, lesser units are allotted.
These were some of the benefits of investing in mutual funds through SIP. SIP investments may work out in favour of those with a long term investment horizon and may help them achieve financial goals like building a retirement corpus or accumulating wealth in the long run.