Opting for mutual funds (MFs) gives you the opportunity to invest in the capital markets while reducing your risks. However, you may want to know whether investing a lump sum or opting for a systematic investment plan (SIP) is a better option.
If you are a disciplined investor, both these options are advantageous. When you invest your capital as a lump sum, you are able to build wealth over a longer period of time. The power of compounding gives you the opportunity to enjoy capital growth in the long-term. On the other hand, SIPs provide averaging cost opportunities. Under such options, you invest a certain amount at periodic intervals, which allows investment in higher and lower markets.
Here are four factors you must consider before you make the decision between lump sum and SIP investments.
- Salaried or self-employed
As a salaried employee, you receive a monthly income. Therefore, investing through the systematic investment plan may be a better option. It develops investing discipline, thereby encouraging wealth growth over the long term. In comparison, if you are self-employed, you may not have a fixed monthly income. You may receive large fees and, therefore, opting for lump sum investing may be advisable.
- New or experienced investor
If you are new to investing in the equity markets, opting for the systematic investment plans is advisable. The stock market is volatile and risky and new investors may be unwilling to assume high risks, which makes investing in SIPs a better option. However, if you are experienced and willing to assume higher risks, directly investing in the stock market may be advisable. However, you must do your analysis and research before making the investment decision.
- Investment horizon
If you are saving to meet a financial goal in the short term, such as three years or less, lump sum investment may be beneficial to build wealth. Furthermore, choosing debt funds to meet your financial goal is recommended.
- Windfall returns
In case you receive an annual bonus, opting for a systematic transfer plan (STP) may be advantageous. Under this option, you invest the bonus in a liquid fund and later transfer a fixed monthly amount to another fund of your choice.
Systematic investment plans have several benefits, such as risk mitigation while offering you flexibility. Furthermore, starting such plans is simple and hassle-free. Additionally, it inculcates investment discipline, which is an important factor to achieve financial independence.
The choice between lump sum and SIPs depends on your personal objectives and risk appetite. You may use one of these investment options or both to meet your financial goals. However, regularly monitoring your investments is important.