If you haven’t yet started financial planning, you are ignoring the idea of smart investing which is crucial for securing your future financially. A lot of individuals realize the importance of saving and investing when they near retirement. And unfortunately, most of the times it is too late. Well, it is never too late to start investing but the earlier you start, the more time you have in hand and your investments, too get more time to grow. There are several investment options available depending on what kind of individual you are.
If you are someone with zero risk appetite who is alright settling with lower interest rates, then traditional investment options like bank fixed deposits (FDs) or public provident fund (PPF). But if you are someone who wants to try investment methods that offer higher returns but carry equally high investment risks as well, then you can consider the idea of investing in mutual funds.
What are mutual funds?
Mutual funds are professionally managed funds where the fund manager buys/sells securities in accordance with the scheme’s investment objective. Fund houses collect money from investors sharing a common investment purpose and invest this pool of funds in stocks and various money market instruments like corporate bonds, government securities, call money, treasury bills, etc. Investors receive mutual fund units in proportion to the money they invested and also depending on the fund’s existing net asset value (NAV). The performance of a mutual fund highly depends on the performance of its underlying assets and the performance of the sectors in which these assets are invested.
What is SIP and Lumpsum investment?
Individuals have two mutual fund investment options – SIP and Lumpsum. Let us understand each of these concepts briefly.
SIP: Systematic Investment Plan or SIP as it is commonly acknowledged as is a systematic approach towards mutual fund investing. In this electronic investment approach, all you need to do is instruct your bank and every month on a fixed date, a predetermined amount is debited from your savings account and transferred to your mutual fund. SIP is easy and hassle-free approach and you can invest in mutual funds without having to visit the fund house in person.
Lumpsum: A lumpsum investment is basically making the payment of your mutual fund investment in one go. When you make a lumpsum payment you usually pay the beginning of the investment cycle. One good thing about lumpsum investment is that you are allotted more number of mutual fund units as per the fund’s current NAV. As the fund grows and continues to make progress, the value of the units that you received also go up.
What is better – SIP or Lumpsum investment?
Now the answer to this question entirely depends on the purpose behind your mutual fund investment. For example, if you want to remain invested for the long run and are considering mutual fund investments to fulfil your long term investment goals like building a retirement corpus then start a SIP would be a great idea. That’s because you start investing with smaller amounts at regular intervals and eventually benefit from compounding as well as rupee cost averaging. SIP has the power of turning small investment amounts into commendable corpuses and you may continue investing in mutual funds through SIP till your financial goal is achieved.
On the other hand, if you have surplus cash parked which is sitting idle and want to put it to better use, you can make a lumpsum investment in mutual funds. The only drawback of a lumpsum investment is that your entire investment amount is exposed to the volatile market conditions. Hence, you need to have a high risk tolerance if you want to make a lumpsum investment in mutual funds.
Now that you know the difference between SIP and lumpsum investment, how are you planning to invest in mutual funds? No matter how you invest, make sure that you invest sufficiently so that you can get closer to your ultimate financial goal.