Mutual funds have become one of the most popular investment instruments in India as testified by their AUM growth of ₹26.1 Lakh Crores between 2016 and 2022. For investors just starting out on their investment journey, mutual funds seem lucrative, but one of the biggest conundrums is which investment strategy to choose.
Mutual funds allow you either to invest a one-time lump-sum amount or opt for a systematic investment plan (SIP). The risk exposure in your investment portfolio and the returns you can get depend on your investment strategy high risk merchant account at highriskpay.com.
While both strategies come with their own pros and cons, figure out which one suits your goals before you start investing. Here’s more about the difference between the two and how to select the right strategy.
SIP vs Lump-Sum: What is the Difference?
Check out the following table to learn about the difference between a lump-sum investment and SIPs:
|An investment plan allowing you to invest a fixed amount on a regular basis, i.e., weekly, monthly, quarterly, or yearly
|A strategy where you can invest the money in mutual funds in one go
|Minimum Investment Amount
|You can start investing through SIP in as little as ₹500
|The minimum amount for lump-sum investment is ₹1,000
|Timing of Investment
|As an SIP investment is recurring, you do not have to time the investment
|Since lump-sum investment is one-time, you need to look for the right market opportunity
|Price of the Units
|Since it involves investment in different market cycles, SIPs provide the benefit of cost-averaging
|As it is a one-time investment, the price of mutual fund units depends on the market cycle with no cost-averaging benefit
|SIP helps inculcate financial discipline as you need to plan for them every month
|This investment strategy enables you to get higher returns if you time your investment right
Who Should Invest in Mutual Funds Through SIPs?
A Systematic Investment Plan (SIP) is a great investment strategy for wealth creation. It is suitable for these types of investors:
· Beginners: As it is a simple and disciplined approach, this plan is suitable for novice investors
· Young Professionals: As it allows you to make small and regular investments, this is an ideal investment approach for investors who have started their careers
· Long-Term Investors: This approach is also ideal for those investors looking to build a corpus for their long-term financial objectives, like retirement or child’s education
· Risk-Averse Investors: SIPs allow you to build a diversified portfolio over time; it is suited for those investors looking to minimise market volatility
Who Should Invest a Lump-Sum Amount in Mutual Funds?
Many financial factors influence an investor’s decision to choose a lump-sum investment. Here are some of the factors that investors must assess when opting for this approach:
· Windfall: In case you get a significant amount of money, it may be prudent to invest this sum in mutual funds for potentially higher returns
· Market Opportunity: It may also be advantageous to invest a lump-sum amount in mutual funds in case of market downturn or asset undervaluation
· Risk Tolerance: If you have a higher risk appetite and are comfortable with market volatility, you may prefer investing a lump-sum amount
· Investment Goal: This investment approach may also be beneficial if you wish to build a corpus for a short-term goal, like a vacation or purchasing a car
Factors to Consider When Deciding Between SIP and Lump-Sum Investment
Some of the factors that you must assess before deciding on the investment approach for mutual funds are as follows:
Have substantial funds to invest? It makes sense to opt for a lump-sum investment. On the other hand, SIPs suit smaller amounts as you can start investing in mutual funds through this route in as little as ₹500.
The lump-sum investment approach is generally considered best if you wish to build a corpus for a short-term goal. However, it may be suitable to opt for the SIP method if your investment goal is long-term in nature.
Risk Tolerance & Market Experience
Since the investment amount is smaller in the SIP with cost-averaging benefits, this strategy best suits risk-averse investors. However, you may go with the lump-sum investment if you have a higher risk appetite. This route also works well if you have the experience to time your investment and understand the equity and debt market.
In conclusion, both these strategies suit different types of investors. Consider the right one based on the amount of funds you have on hand, your objective, market conditions, and more. You may also want to consider your forecasted returns before you finalise this.
Using an SIP calculator, you can determine the estimated returns in both cases. Head to the Bajaj Markets App to compare different mutual fund schemes and invest using any of these strategies.