If you are familiar with what is a mutual fund, you may know there are two ways to invest in it – SIP (Systematic Investment Plan) or lumpsum payments. Experts recommend investing in mutual funds via SIPs over a lump sum route. Here, we look at why SIPs can make a better investment option than a one-time investment.
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Rupee cost averaging
With SIPs, you can invest a fixed amount of money every week, month, or quarter, based on your financial budget. This allows you to enter the market at different stages in the cycle. Thus, when prices are high, you end up purchasing lesser units of mutual funds. Conversely, when prices are low, you can buy more units. In short, SIPs allow you to reduce the overall cost of your investment by averaging out the purchase cost.
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Financial discipline
If you invest in mutual funds via the lump sum route, you may be tempted to withdraw your money if the fund starts to underperform. However, SIPs teach you financial discipline by making regular investments a part of your financial planning. You can develop the habit of saving once you know you need to keep money aside for SIPs. Since you understand the concept of rupee cost averaging, you are less likely to withdraw even if the scheme underperforms.
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Perfect for novice investors
As a budding investor, you can start with SIPs as low as Rs.500 to begin your mutual fund investment journey. With experience, you will be able to understand how the mutual fund market works, you can raise the investment amount gradually. With a lumpsum payment, it can be riskier to invest if you one has little to no knowledge about the different mutual fund schemes.
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No need for monitoring the market
As we saw earlier, SIPs let you invest at periodic intervals. Here, only a part of your investment faces market fluctuations at a given point. So, you do not have to continually monitor the market during its highs and lows as your investment is spread over time. On the contrary, if you invest a lumpsum amount at one go and the market underperforms, it can prove to be risky.
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Better past performance
Once you understand how to invest in SIPs, you will be able to realise how the concept of rupee cost averaging plays a significant role in earning higher returns compared to lumpsum investments. Historically, SIPs are known to perform better in the long run.
Conclusion
To summarise, a SIP in mutual funds can outdo lumpsum payments as they provide benefits such as rupee cost averaging and instil the discipline of regular investing. SIP investments are ideal for investors belonging to different income brackets by allowing them to invest in mutual funds as per their investment budget.
