Mutual funds are one of those investments that everyone should consider having in their portfolios. They offer the benefits of diversification, professional fund management, and goal-based investing. If you are considering investing in mutual funds, you must know that there are two ways to do it – lumpsum investment and the Systematic Investment Plan (SIP) option. Each has its own advantages and is better suited for a specific type of investor. Let’s find out which one is better for you.
When to choose lumpsum investment
- You have a significant amount of savings
One of the first things you need to have when wanting to make a lumpsum investment in mutual funds, or any investment product, is a chunk of money that you can spare for investing. So, if you just received a bonus or had a major freelance project and don’t need that money to meet your monthly expenses, you can go ahead and make a lumpsum investment. This is also applicable for when you have been saving diligently for a while now every month and have a substantial amount to invest.
- You can identify market cycles
Making a lumpsum investment in mutual funds works best when you have sufficient knowledge of how the markets work and can identify market cycles. This is because you can then apply the golden rule of investing – buy low and sell high. So, if you make a lumpsum investment when the market is low, you could earn higher returns in the long term as compared to an SIP investment. However, if you make an ill-timed investment, you could incur a huge loss.
When to choose SIP investment
- You have low amounts to spare monthly
If you are just beginning to save and invest or if you already have most of your money allocated to other investments, then SIP might be a more beneficial option for you. You can start an SIP investment with as little as Rs. 500 a month. Hence, this option allows you to access the market even if you don’t have a lot of money to spare in one go.
- You want to benefit from rupee cost averaging
SIP investments make use of the rupee cost averaging strategy. Here, you invest a fixed amount of money in regularly spaced-out intervals for a predetermined period irrespective of how the market is performing. The need to time the market is done away with – more units will be bought when the price is low and fewer units will be bought when the price is high. This not only averages out the cost of your investment but also helps reduce the impact of market volatility.
Both methods of investing in mutual funds are great depending on what’s the most convenient for you. You can also use a lumpsum calculator and an SIP calculator to see how each will help you meet your financial goals.