Is SIPs better than lump sums in mutual fund investing?

Mutual funds may be thought of as a collection of funds from many investors. Subsequently, the money is invested into assets like stocks, bonds, and other asset types. Furthermore, there are two ways to invest in mutual funds: lump sum and SIP investments. Several factors influence the decision of whether an individual should make a lump-sum payment or invest through a systematic investment plan (SIP).

What is a Lumpsum Investment?A lumpsum investment allows investors to deposit the total amount available in one transaction to purchase a specific quantity of mutual fund units. When a fund's net asset value, or NAV, is low, this method of investing is advantageous. Individuals could acquire more units with a lower NAV. On the other hand, a greater NAV limits the number of units available to an investor in the same lumpsum investment amount.

What is a SIP Investment?A systematic investment plan, or SIP, allows individuals to put a small amount of money into a mutual fund scheme every month. This is a systematic way of regularly allocating fixed sums of money, as the name implies. This could be done semi-annually, quarterly, or monthly, among other options.

A monthly fixed sum is withdrawn from an individual's bank account when a systematic investment plan is activated. As a result, if one invests consistently in this manner, accomplishing one's financial goals may become more achievable.

Unlike a lumpsum investment, a systematic investment plan allows people to spread their total investment sum over a certain period of time. As a result, no large sums of money are required to begin investing in mutual funds through SIPs. Investing thus, helps them foster a feeling of financial responsibility in the long run. To know more about the returns you would get through SIPs, you can use Axis Bank SIP Calculator.

Now that you have a fundamental understanding of the investing modes, let's look at the differences between SIP and lumpsum.

Which is better- SIPs or Lumpsum?The answer to this question is contingent on the current state of the stock market. According to an AMC, when markets are rising, lumpsum mutual fund investments may tend to produce good returns, but SIP investments may generate better returns when markets are on the decline.

Lower InvestmentInvestments varying from as low as Rs. 500 to Rs. 1000, are acceptable for you to start investing in SIPs. On the other hand, lumpsum investments will require a greater initial investment amount. SIP calculator allows investors to calculate and predict the returns on their SIP investments.

Rupee-Cost AveragingA SIP could help distribute your money over time throughout both rising and declining markets. When you invest in lumpsum, your money buys fewer units of the mutual fund when the market is up and more units when the market is down. As a result, a SIP allows you to cut the average cost of your investment while also lowering the risk. Rupee-cost averaging is the term for this.

Ideal For Budding InvestorsStarting a SIP is an excellent way to begin investing if you have just started your professional job. In this manner, you may gain exposure to equities in as little as Rs. 500 per month. Later, you could move into riskier stock programs depending on your investment demand and risk appetite.

Less StressfulMany investors, particularly inexperienced ones, are unsure when to come into the market. If you invest a lumpsum of money in one go, you run the danger of losing a large percentage of it if the market crashes. And during a market high, you stand to gain a lot of money. However, this constant unpredictability could be stressful.  With a SIP, your money is spread over time, and only a portion of your investment is exposed to market volatility. This in turn reduces your stress levels with regards to market fluctuations.

Tax BenefitsUnder Section 80C of the Income Tax Act, 1961, the lumpsum technique of mutual fund investment provides tax benefits of up to Rs. 1,50,000. If you invest in ELSS funds over a considerable period of time, you could expect credible returns.

Personal RisksBefore choosing one of the two mutual fund investment techniques, it is critical to understand the investor's specific risk appetite.

The critical difference between a SIP and a lumpsum deposit is the level of risk involved. On the one hand, because recurring contributions are concerned, SIP provides capital protection; on the other hand, lumpsum demands a large corpus in one go.

ConclusionThere will never be a straightforward choice between SIP and lumpsum. As they go hand in hand, there is always an 'and' between them. It is quite difficult for an investor to limit himself to one type of investing.

Lumpsum or SIP mutual fund investments each have their own advantages and work for various people at different times. The contrast between SIP and lumpsum, on the other hand, should be borne in mind. As a result, it's usually best to start investing early in order to gain from the power of compounding and its long term benefits.

The decision to invest in mutual funds via SIP (Systematic Investment Plan) or lumpsum is entirely up to individual investors and their risk tolerance.

Before investing their hard-earned money anyplace, investors should properly investigate the mutual fund, its outcomes, payment mechanism, and other factors.

Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully.

Parag Nesarikar