Mutual fund: SIP or lump sum? - Part I

In one of earlier articles we have explored why equity investment through mutual fund route is a better choice for retail investors vis-à-vis direct equity investment. Further mutual fund investments can be done in two modes - lumpsum or SIP (Systematic Investment Plan). Herein we discuss these two modes and relative benefits of SIP for retail investors.

In lumpsum investment an amount is investment in mutual fund in one go. While in SIP once you have decided on the amount you want to invest every month/quarter and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or ECS instruction, and the investment will be made regularly.

Benefits of SIP

Benefits of SIP over lumpsum mutual fund investment for retail investors are manifold:

• Instills investment discipline: When it comes to investment, discipline pays big in long term; you must have heard the tortoise and the hare story. SIP provides a way to put discipline into practice by investing a fixed amount at regular intervals. Most mutual funds provide SIP with varied frequency for investment – monthly, quarterly. Besides investor has the choice of deciding the date on which installment is made like 1st, 5th, 10th, 15th and 25th of each month.

• Doesn’t need large upfront amount: Doesn’t need large amount upfront for starting an SIP. While different mutual fund has different minimum amount for each SIP installment, it can be as less as Rs. 500 each month. This is very convenient for people who have predictable income (like salaried people) and wants to invest surplus money in mutual funds after taking care of their expenses.

• Provides rupee cost averaging: To maximize profit, ideally stocks are to be bought when prices are low and sold when prices are high. But this is easier said than done, seasoned investors also fail to time market many cases, leave aside retail investors. Herein, Rupee Cost Averaging strategy comes handy. In this strategy equal amount is invested regularly in stocks over a period of time. This way more shares are purchased when prices are low and lesser shares are purchased when prices are high. This lowers the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over the period of time.

• Limits volatility: SIP helps negotiate swings in stock market better; you get to sleep easy at night! 

In part II of the article we will further illustrate these points with examples. Stay tuned.

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