If you are a novice when it comes to planning your finances then it is time you start bucking up, as there is no better time to invest in the market than NOW.
There are several ways of saving your money and investing it in relatively “safer” options such as fixed deposits, PPFs etc., but that might not always be the best option. If you want your money to grow, you have to make it work for you. The option of investing in Mutual Funds is perhaps one of the best and most effective ways with which you can seek long term wealth creation. This thought opens the doors to the two most popular investment strategies in mutual funds – Systematic Investment Plan (SIP) and lump sum investment in mutual funds. So which one befits you?
We’ll let you decide.
To qualify for either of these options you need to answer a few questions –
Do you have money to invest?
As trivial as this may sound, you need to know your financial capacity. Do you have enough money to set aside for a while? If yes, then you qualify for a lump sum investment strategy and of course even for a SIP. If in case you do not have such a corpus to set aside, a smaller, staggered outlay through SIP is a lesser strain on your pockets.
When do you need the money?
Right now! – If this is your answer, we’re afraid you do not qualify for these investment options. Why? Because SIP would compulsorily take away from you the set amount on a particular day of every month. As far as lump sum is concerned, you will have to part with it in one go. However, if you can wait for your funds to grow, then you could definitely opt for either or even both the options depending on your funds availability.
When to SIP & When to gulp?
The decision to invest in lump sum would be more intuitive and dependant on the market. You are lucky (read: smart investor) if you opt for a lump sum when the markets are down, as you get to enjoy more units. It would be quite a disappointment if you invest in lump sum at the wrong time. For instance, you would have enjoyed a CAGR return of around 13.55% had you invested a lump sum in the market (S&P BSE Sensex) 2 years ago but would have suffered a - 5.72% loss if it had to be a year ago (source: Bloomberg and Fundsupermart Research compilation as on 22nd Sept, 2015).
However, for a more disciplined and systematic investment, you can opt for a SIP. SIP also gets away with the hassles of market timings. With SIP, you set a fixed amount that is going to be deducted from your bank account every month through Electronic Clearing Service (ECS). The SIP acts as a risk absorber, that is, the market fluctuations do not really hit your funds. When the market is low, by the virtue of SIP you get more units added to your account, and vice versa. This way, monthly amount of investment doesn’t at any point rise or decline, it remains constant.
So what’s the conclusion?
While both options have their shares of advantages and disadvantages it really depends on your ability to invest, your risk appetite and the patience you hold. If you do have a lump sum amount and don’t really know what to do with it, you should ideally put it away – that is, invest the entire money (subject to market conditions). However, you can opt for a SIP if you cannot part with such a huge sum at a go but have the assurance of regular income, at least enough to pay the monthly installments.
Whatever you opt for, ensure that you do invest and make your money work for you!