Mutual funds can be viewed as a collection of money from many investors. The corpus is subsequently used to purchase securities, including stocks, bonds, and other types of assets.
The cash flows are the main distinction between SIP and lump sum mutual funds. In a SIP, one invests on a regular basis rather than once in a large sum. There is no restriction prohibiting a SIP investor from making a lump sum investment when there is extra money available.
What is SIP investment?
An investor can transfer a small amount of money on a regular basis to their favourite mutual fund scheme through a SIP or systematic investment plan. As the name suggests, this is a systematic way to regularly distribute predetermined sums of money. This may occur annually, biannually, quarterly, monthly, etc.
When a systematic investment plan is activated, a set sum is automatically taken out of a person’s bank account each month. As a result, if one invests continuously in this way, accomplishing one’s financial goals may be simpler.
Individuals that choose a systematic investing plan, as opposed to a lump sum investment, spread their investment over time. As a result, one does not require a sizable sum of money to begin a SIP investment in an MF.
What is lump sum investment?
With a lump sum investment, investors can pay the total money to purchase the specified number of mutual fund units. This method of investing typically pays off when a fund’s net asset value, or NAV, is lower. In this case, a lower NAV enables people to buy more units. On the other hand, a more excellent NAV limits the number of units an investor can purchase.
Which is better?
Both lump sum investments and SIPs have advantages of their own. Choosing between these two can be difficult for investors. Nevertheless, being aware of the distinctions between the two will aid in making a wise choice.
The main distinction is the cash flows between a lump sum investment and a SIP. Individuals only ever invest a lump quantity of money. But with a SIP, people make monthly investments.
A SIP is preferred by many people because it fosters financial discipline. A lump sum investment, however, requires assigning funds all at once. Therefore this is not the case.
Additionally, people must consider a few important factors while choosing an investment strategy that is right for them. These variables include the type of fund, the available cash, the investors’ financial ambitions, and the investment goals.
Differences between lump sum and SIP investments:
- Investors could keep a close eye on the market because SIPs could expose them to various market cycles. Since lump sum investments are typically made for the long term, investors do not need to keep an eye on the market.
- SIPs offer greater investment flexibility than the lump sum alternative. Lump sum investments are rigid.
- SIPs are not exceptionally responsive to market turbulence. Investments in lump sum are pretty responsive.
- This investing option can assist investors in developing financial discipline as they establish the habit of making planned investments. The investment’s one-time nature prevents it from fostering such discipline.
SIP vs. lump sum cannot ever be an option. Since they complement one another, there is always a “and” between them. A single sort of investment choice cannot be selected by an investor alone. lump sum or SIP mutual fund investing has its own advantages and is suitable for various investors at various periods.
One could, however, be aware of the distinction between SIP and lump sum. Therefore, it is usually advised to start investing early in order to benefit in the long term from the power of compounding.