Advantages of Lump sum investments vis-à-vis SIP
BLURB: The key here is the conviction in equity investing and ability to hold on to your investments in volatile times.
Talk of mutual funds and what comes first in the minds of the investor is SIP or systematic investment plan. With right promotional push, SIPs have become a synonym to the name “mutual funds” and have now become a household name. It enjoys the top of the mind recall and makes many believe that to invest in a mutual fund one has to invest a fixed sum monthly. The myth ensures that some individuals – typically self-employed, with irregular income end up avoiding mutual fund as they may not have regular income. But this is not the case; you can also invest lumpsum money in mutual funds. Let’s see how it works.
You typically get decent sum of money at one go in various scenarios like you could get yearly bonus, receive sale proceeds of a property or an asset, one time settlement in a dispute, maturity proceeds of an old investment, etc. In all these scenarios, you can invest that money at one go in mutual fund. In such cases, holding huge sum of money in bank account and then starting an SIP might not be a great idea!
While investing lumpsum money in mutual funds, you need minimum Rs 5,000*, which makes it accessible for most of the investors. You need not commit for any series of investments in future, unlike SIP.
*Minimum investment amount would vary from scheme to scheme
If you are investing the money in liquid funds, lumpsum investing is very much common which not the case with SIPs.
When it comes to equity investing, buying low and selling high is vital to make profit. Thus many smart investors invest large sums of money when the stock markets correct. The key here is the conviction on the equity market and ability to hold on to your investments in volatile times. If you can stomach volatility and you are a long term investor, power of compounding ensures that lumpsum investments create large pool of wealth over a period of time. However, there applies a caveat that one needs to have an ability to time the market well. With SIP, you invest the same sum of money irrespective of the market condition. Thus it works well when the market goes down and in the times of volatility but when the market moves up, you end up buying lesser units!
Simple, lumpsum investing works well as compared to SIP only if the invested during the market slump or at lower valuations. However, lumpsum investing doesn’t work if you are overinvested when the market valuations are stretched or when the markets correct sharply in the early phase of your investment journey.
To summaries – Be it lumpsum or SIP, investing is more important to meet your life goals. Choose either of lumpsum or SIP way of investing based on your liquidity condition. Lumpsum investing is a way forward for you, if you are a pro who has the ability to gulp in the anxiety of holding on your investments despite losses during the market corrections. But if you are a novice investor with lots of cash and the market is exuberant, you can invest lumpsum in the liquid fund and start an STP from that liquid fund to the equity fund.
So which is your way of investing? Choose wisely to create wealth in the long run!