You may have heard that there are two ways of investing in mutual funds (MFs). One is lump sum investing and the other is called systematic investment plan (SIP) investing. As the names suggest, lump sum investing refers to investing all the funds in one go, whereas SIP is a fixed investment made periodically over the long term. Usually SIP investment is considered superior to lump sum investing.
Benefits of SIP over lump sum investment plans:
There are a number of reasons why SIP investment should be favoured by investors especially in equity funds, these are:
- No need to worry about timing the market: Are you worried about the right time to start investing? Many investors are afraid to enter markets when they are low because they may lose their funds, while others are not sure if a rally in a market will last. With SIPs, since you invest over a period of time gradually, your entire investment amount won’t be subject to volatility at any given time.
- Rupee cost averaging: When you invest in sip, you can buy MF units across market cycles; when the market is low, you get more units allocated for your fixed investment and when it is high, you get fewer units. Over a period of time, your cost of purchase of units averages out.
- Investment habit: When you start a SIP, you invest regularly inculcating the disciplined habit of regular investments. If you start a SIP at the beginning of the month, you can even automate monthly savings by automatically paying the SIP amount as soon as your salary is credited thus saving before spending.
- Ideal for certain investors: SIP is a good investment methodology especially if you are new to investing or you are too busy to conduct adequate research in picking the right fund. In fact, SIP investing is suitable for all investors. You can experience equity investing with a nominal amount using a SIP.
- No requirement of upfront funds: Lump sum investing requires a large amount to be available for investment. In comparison, SIP can be made with small amounts.
SIPs are suited to the needs of most investors:
As we have seen, SIPs eliminate many roadblocks to investing like lack of a large capital amount, need to time the market and the lack of investing skills. If you would like to start a SIP, you can explore using a mutual fund calculator to work out your ideal SIP amount. Usually all you need to do is enter the amount you wish to invest per month, your expected rate of return and the period of investment in years, and you will get the expected final maturity value of your SIP. As an example, Rs. 5,000 invested at 12% per annum for 10 years will generate Rs. 11.6 lakh (approx.)
SIPs are a gateway to mutual fund investments; they can help investors generate wealth with regular small doses of investments while greatly reducing the risks attached with stock market volatility.