Mutual Funds offer many different modes of investment to investors for their convenience. Unfortunately, sometimes these investment modes create confusion among investors as they face the dilemma of making the right choice. One such common and the frequently asked question is whether to invest via SIP or lumpsum?
Many new and existing investors end up making the wrong investment choice due to a lack of knowledge or misleading advice. They end up opting for SIP mode just because it is promoted more or because the minimum investment amount is less compared to lumpsum. One can start an SIP with as little as ₹500, whereas for lumpsum the minimum required amount is ₹5000.
In fact, many advisors also mislead the investor with things like, invest in a lump sum if the market is rising, and in SIP if the market is falling. This advice is completely baseless as it is based on getting the market timing right which is a proven futile activity.
The reality is that there is no “better” way of investing. A disciplined investor will be able to invest well via both modes. Therefore, the choice of selecting the perfect mode of investment should depend on your financial situation and risk profile only and not on any lame reason which proves that one mode is superior to another as that’s not true.
Let us understand the real factors which play a vital role in determining which mode of investment to opt for :
- Your Cashflow Situation
SIP is a regular investment of a fixed amount over a period of time. Therefore you should opt for this mode only if you have a regular fixed inflow of funds available and are certain to have the same in future as well. However, if your income is not predictable or unreliable it is not advisable to opt for SIP mode, instead go for lumpsum mode. This is especially true for freelancers.
- Your Risk Appetite
If you have a high-risk tolerance level you can choose to invest via lumpsum mode, you are investing the entire amount in the market in one go. However, if you are a conservative or moderate risk appetite investor, you should go for SIP mode as you will be spreading your investment over the different time period and getting the benefit of Rupee Cost Averaging.
As I mentioned earlier, a disciplined investor can make the best investment decisions irrespective of investment mode. However, if you are not that disciplined then you can go for a systematic investment plan as it enforces consistency and discipline in investing. Even if you don’t have a regular income you can still select a systematic route via STP