Investment in mutual fund’s schemes can be done in two ways. The first way is investing the whole amount at once i.e. lump sum. The second way is to start a systematic investment plan (SIP). Both ways are very different from each other. Lump sum route involves making an investment in mutual fund scheme in a single instalment while SIP involves investing in fixed instalments throughout the year either on monthly, quarterly or half yearly basis. In this article, we will understand which way of investing is good for you i.e. lump sum vs. SIP.
Let us first learn about which type of investment will give you higher returns.
Lump Sum vs. SIP: Which Type of Investment Will Give You Higher Returns
The stock market condition determines which investment type is better between lump sum and SIP. When the market is in bullish mode or an uptrend, lump sum investment can be considered good, but in the bearish or falling market, SIP will give you better returns in comparison to lump sum investment.
Lump sum and SIP investments both have their advantages but overall SIP investment is considered better than the lump sum. In this section of the article, we shall learn the advantages of SIP over lump sum investment.
Advantages of SIP Over Lump Sum Investment
SIP investments can create good wealth for you because of compounding effect. This is because in SIP you earn returns on the already made returns on your investment. The returns remain invested in the SIP and they keep growing if held for long term horizon.
- Rupee-Cost Averaging
It is not possible for anyone to time the market correctly. In such a scenario, SIP is the best option to go for. This is because in lump sum investment you buy the mutual fund units once and if the markets fall, the returns go negative. This is not the case with SIP investment as you invest regularly in all the phases of the market. SIP enables you to lower the cost of investment and reduces your risk by making an investment in every phase of the stock market.
- Disciplined Investor
SIP helps you in becoming a disciplined investor as you regularly invest money in the mutual funds. This helps in developing a habit of saving a minimum amount to be invested via SIP. The real benefit of being a disciplined investor is in the long run because continuous investment in SIP can make huge wealth for you and support your future life after retirement.
- Less Stressful
SIP investment is any day less stressful than the lump sum investment. The stock market is volatile and you might be forced to withdraw money from the mutual fund. If you have made lump sum investment then withdrawing money can be painful as there can be losses. But in the case of SIP, you invest in all phases of the market and even when you have to withdraw money for an emergency, your mutual fund unit cost is much lower. Thus, spreading the investment in different time periods via SIP makes you less stressful.
Investing in mutual funds must be done after consulting the financial advisors. Kotak Securities is one stop solution for all your investment needs. If you are a beginner or a seasoned investor, you can contact us and seek the help of our expert to handpick right mutual fund for you. We ensure your money is put to work to create future wealth.