If you have decided to invest in mutual funds, the next question comes up almost immediately: should you invest a fixed amount every month, or put the whole sum in at once? Both are good methods. The right one depends on how your money arrives and how comfortable you are with market ups and downs.
How a SIP works
A Systematic Investment Plan (SIP) moves a fixed amount from your bank account into a fund on a date you choose, usually monthly. When the market is low, the same amount buys more units. When it is high, it buys fewer. Over a long period this averages out your purchase cost, which is often called rupee cost averaging.
The bigger benefit is behavioural. A SIP removes the need to guess the right day to invest. Most people who try to time the market end up waiting too long or buying after a rally.
How a lumpsum works
With a lumpsum you invest the full amount on one day. If markets rise after that, the whole amount benefits from the start, so a lumpsum can do better in a steadily rising market. The flip side is that if you invest just before a fall, you feel the full impact immediately.
A simple way to choose
- You earn a monthly salary: a SIP is the natural fit. You invest as the money comes in.
- You received a bonus, maturity amount or sale proceeds: you have a lumpsum. You can invest it in one go if your horizon is long, or park it in a liquid or short-duration fund and move it in gradually over a few months.
- Your goal is more than 5 years away: both work, and the difference between them matters less than staying invested.
- You get nervous when markets fall: choose SIP or a staggered lumpsum. A plan you can stick to beats a plan that looks better on paper.
The middle path: STP
A Systematic Transfer Plan lets you put a lumpsum into a low-risk fund and shift a fixed amount into an equity fund each month. You get the discipline of a SIP while your idle money still earns something.
Before you start
Pick the fund based on your goal, time frame and risk comfort, not on last year's returns. Mutual fund investments are subject to market risk, so read the scheme documents before investing. If you are not sure where to begin, our team can walk you through the options.
FinMighty TeamInvestment, loan & insurance advisors, JaipurThis article is for general information only and is not personalised financial, tax or legal advice. Please see our Disclaimer.
