There are two primary ways of investing in a mutual fund — lump sum and SIP. A lump sum investment is a one-time investment while a SIP (systematic investment plan) is a recurring investment.
A lump sum investment is generally considered when the investor has a big corpus to invest. This could be money received after retirement or from the sale of a house or from an inheritance or it might just be the case that you have accumulated money in your bank account and wish to invest it now. There can be many reasons to consider a lump sum investment, but a SIP is generally recommended. This is more so in the case of investments in an equity mutual fund being made out of recurring income.
Which is better?
- Before deciding which investment method to go for, one needs to see how much money a person can invest. If an investor has a regular income and is able to save some money, he can choose to invest in SIP. Else if an investor has a large sum of money, he can go for lump sum investment.
- Two factors are important when investing: the amount of money invested and the duration of investment. The more the money invested for longer duration, the better it is, that is, higher the return.
- In SIP, you buy both when the market is down, and when the market is good and as a result you get a weighted average return over time.
- If the market grows continuously into the future, lump sum investment gives greater returns as compared to SIP.
However in a volatile market, SIP is a safe way of investment.
Thus with lump sum investment, an investor is exposing himself to the vagaries of the market, as there is always a chance of mistiming the market. This risk is reduced with SIPs, because of investment discipline and it helps in averaging the cost without timing the market.