Selection between SIP and lump sum investments.
Investors are often faced with the dilemma of selecting between SIP and lump sum investments. Most importantly, they want to choose an option which gives higher returns. First, one needs to understand how SIP’s (Systematic Investment Plan) works.
It is essentially a mechanism wherein you invest in equity or mutual funds either monthly or quarterly. Numerous fund houses provide the option of daily SIP’s too. You have to select the amount you wish to invest at regular intervals. Keep in mind that this amount remains the same irrespective of market fluctuations. Let’s say, you decide to invest Rs.4500 in an SIP on a monthly basis; this implies that each month on a specified date you will invest Rs.4500. Over the years, the SIP will add up and give substantial results.
Lump sum as the word implies indicates that a huge chunk of money is invested into the market at one go. This kind of investment behaviour can fetch great returns at times but it can also be destructive when the markets are volatile. In such situations when it is tough to time the market, SIP’s are a safe alternative. As a small amount of money is invested over an extended period, the risk is spread evenly as opposed to lump sum funds wherein the whole amount is at risk.
In addition, SIP’s help to cultivate a regular habit of saving. You will not be able to spend on things you don’t need since the specified amount will be automatically invested.
To conclude, it is vital to have a detailed understanding about your cash flow and monetary aims before deciding to go for SIP or lump sum investment. If you earn regular income every month, it is favourable to choose an SIP. Nonetheless, if your earnings are irregular and once in a while you earn more money, capitalizing those funds in a lump sum investment might be a good idea.
Make sure that you place aside a part of your income each time you get sizeable amount of funds. Considering the immense advantages of SIP, you can also invest a small amount in SIP out of your income so that you can pay for it monthly even if it’s Rs.500. If you can balance between SIP and lump sum investing effectively, you can build a healthy portfolio and achieve your monetary goals without any difficulty.
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