Two popular methods stand out when it comes to mutual funds and stocks. These are the Systematic Investment Plans (SIPs) and lump sum investments. Both approaches offer unique advantages. They cater to different types of investors. It depends on their financial situations and goals. Understanding the strengths and limitations of each of these is integral. For Indian investors, it can guide the way to long-term growth of their portfolio. Continue reading to learn more about SIP vs LumpSum and which is better for Indian investors.
What is SIP?
In simple terms, this is a way to invest money. In SIP, investors place a fixed amount of money. This is placed into a mutual fund or a stock at regular intervals. The intervals can be monthly, quarterly, semi-annual or annual. SIPs help investors stop worrying about market timing. Moreover, there is no need to predict how the stock market will function.
SIPs use a method called Rupee Cost Averaging. When the market goes down, more units of mutual funds are bought. However, when the market goes up, fewer units are bought. Thus, this helps to average out the cost of investments. Short-term market changes do not impact the long-term returns on investments.
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Generating Returns through SIPs
SIPs generate returns through the power of compounding. Compounding implies that the returns earned on investments are reinvested. Hence, this leads to growth over time. For instance, an investor invests Rs. 8000 at an expected return of 12% per annum. After 5 years, the total amount would be Rs. 1,79,132. Moreover, after 10 years, the returns would be Rs. 8,99,132. Again, after 15 years, the return would be Rs. 26,56,592. Finally, after 20 years, the return would be Rs. 59,15, 602. In total, the complete investment over 20 years would be Rs. 19,20,000. This is due to the compounding effect.
Benefits of SIP Investment
There are several advantages of SIPs. Firstly, they are easy to start. There is no need for extensive knowledge about the stock market. Anyone can start with just Rs. 100. Also, the investment amount can increase over time. Furthermore, it aids in building a habit of saving. A fixed amount is automatically deducted from the account. This helps in developing a saving habit. Moreover, it builds funds for the future.
Along with this, SIPs are flexible. If a full investment cannot be made in a month, it can be adjusted. The amount can also be increased at any given time. Also, investors need to worry when the market is down. However, with SIPs, timing does not matter. Investing during market dips can be beneficial. Here, more mutual funds units can be bought. This can be bought at lower prices.
Finally, SIPs allow for diversified investments. Investors can select which funds to invest in. These can include large-cap, small-cap, mid-cap, EFTs, and debt funds. This can be done through multi-SIP or combo SIP.
What is LumpSum Investment?
As the name implies, here money is invested all at once. SIPs include regular smaller amounts. However, lump sum investment includes a large amount upfront. The return depends on how the stock market performs. For instance, an individual invests Rs. 10,00,000 as a lump sum investment for over 20 years. The returns are, therefore, Rs. 86,62,960 if the market performs well.
Benefits of LumpSum Investment
Here, only one large sum of investment is needed. There are no ongoing contributions. Individuals can just invest once and let it grow. Furthermore, this type of investment is ideal for those with surplus money. This could be from a bonus. The bonus can be inheritance or savings. A lump sum investment can boost a portfolio right from the beginning. Moreover, the amount is invested only once. This implies that there are no gaps in investment. Thus, the money starts earning returns immediately.
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When to opt for SIP?
SIPs can be opted for without a large sum to invest in. This is suitable for investors who can regularly invest for up to 5 to 10 years. Moreover, individuals with regular income or salary can opt for this. It helps investors who are looking for better returns than traditional savings.
Furthermore, it is beneficial for people who want to develop a saving habit. It helps when there is a small amount of investment. When this amount is gradually invested, it shows significant returns. More importantly, it is lucrative for individuals planning for retirement.
When to opt for a Lump sum investment?
Lump sum investments are ideal for investors with large amounts of money. This is referred to investors who can handle short-term market fluctuations. Moreover, investors who are comfortable with the risk of investing large amounts should go for this. Alongside, those who understand market timings and functions can opt for this. It is integral that an investor has proper market knowledge before opting for this.
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Conclusion
Opting for SIP or lump sum investment can differ according to circumstances. Both of them have unique benefits. Also, the risks for both are highly different. While one is much safer when it comes to small investments, the other provides high rewards. Individuals should calculate as to which one is most beneficial to their plans. If a person wishes for long-term investment plans, they can opt for SIP.
However, if there is ample surplus and the person wishes to take a calculated risk, they can opt for a lump sum investment. In the latter, the risk is higher. However, the rewards are also higher. Therefore, it is always advised that the investor study the market fluctuations carefully before investing.