Investment - SIP vs Lumpsum
It is easy to invest in mutual funds as you have the flexibility to choose from two different options depending on affordability. As an investor, the most important thing you need to know is your investment portfolio, which includes your income, risk appetite, expenditures, and financial goals.
Investments can be made through either a Systematic Investment Plan (SIP) or a lumpsum payment. In this article, we will talk about these modes of investment and which one is better suited for new investors.
SIP
A systematic investment plan allows you to invest in mutual funds in a staggered way. You can invest a desired amount in mutual funds every month through a SIP. SIPs are popular as they allow an investor to invest a small amount on a periodic basis. SIP is ideal for those who don’t have a lump sum of money to invest but are keen to invest in mutual funds.
Must Read: Difference Between Mutual Funds & Shares
Lumpsum
A lumpsum investment is when you invest a large sum of money in mutual funds all at once. It is ideal for someone who has liquid cash available and has the appetite for a higher risk tolerance.
What are the benefits of SIP over lumpsum investment for a beginner?
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Flexible
SIPs allow you to invest in multiple markets as you don’t have to put down a large amount at once. It is easy to make choices. Whereas, with lump sum investments, you have to choose one and put all your money into that.
Easy
Because you can begin a SIP investment with as little as Rs.100, it is much easier to invest in this manner than in a lump sum. SIPs are available to both amateur and professional investors.
No need to constantly watch the market
For someone who is new to investment, it is not easy to decide when to enter the market. And if you invest a considerable amount all at once and the market crashes, there are possible chances of loss. That is not the case with SIP investments, as your investment is spread over a period.
Rupee cost averaging is a benefit of SIP that brings down the cost you pay per unit of a stock over a long period. It is a technique where you invest a fixed amount of money at regular intervals over a longer period, irrespective of the market situation. This ensures that you purchase more units when markets are low and fewer units when markets are high.
Must Read: How To Set Investment Goals
Builds the habit of investment
A good reason for beginners to select SIP as their desired mode of investment is that it inculcates the habit of investment. As you have to set aside a fixed amount every month, it helps you become financially disciplined.
Why is SIP investment ideal for budding investors?
When you are just starting your investment journey, you may not know much about the market. Furthermore, your risk tolerance will be much lower than that of someone with years of experience. If that is the case, a SIP investment is the right choice for you. And there are two reasons for this: first, you can start small and gradually increase the amount. Second, SIPs give you a good spread-out exposure and later you can branch into riskier schemes depending on your risk appetite and financial goals.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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