What is SIP? How SIP is a better investment offer as compared to lump sum investment
Mutual Funds sahi hai. This fact has been corroborated by numerous statistics. For instance, as per reports published by AMFI, the Mutual Fund industry AUM has more than doubled in a short span of five years. But the question remains – should you invest in one go (lump-sum) or should you go for regular investments through SIPs.
What is SIP?
For all beginners, the first question that comes in mind is What is SIP and how it can help them achieve the desired financial goals? Systematic Investment Plans or SIPs are similar to Bank Recurring deposits in principle. One needs to invest a fixed sum of money (contribution) on a periodic basis. The frequency of investment can be chosen by the investor (fortnightly, monthly, bi-monthly or even quarterly) as per their convenience. On the other hand, lump-sum investments require the investor to deposit the entire contribution in one single payment.
Know more why SIPs fare better than lump-sum investments in the long run.
- Financial Discipline
SIPs have played a crucial role in increasing the penetration of mutual funds in the country as it makes it possible for everyone to start investing with a minimal monthly budget. It is a more feasible and practical approach to investing. The biggest advantage of investments via SIPs is that they inculcate a sense of financial discipline amongst the investors. When one knows that a fixed sum of money (i.e. SIP contribution) is going to be deducted on a periodic basis from the bank account, they are more likely to plan their finances better. This minimizes possibility of erratic or impulsive spending habits. Good or bad, habits are known to be contagious. A small change (regular investments through SIP) will ensure structured financial planning in the long-run.
- Risk spread
Lump-sum investments carry a high risk quotient. They can generate high returns if the markets are doing well. However, in case there is a slump or market crash, one can lose a large sum of money. SIPs on the other hand, spread the risk over a long-period of time. With this mode, the investment is done across market cycles. As a result, only limited portion of the investment is impacted by the market volatility.
- No requirement of constant market analysis
Many times investors remain in a dilemma about their entry timing into the market. They keep on waiting for the “perfect” opportunity. This hold true more for the first time entrants or the inexperienced ones. However, this requires them to constantly monitor the market which consumes a lot of time, effort and other resources. More often than not, it leads to a delay in their investment decisions and achievement of linked financial goals.
SIPs take away all this hassle as one needs to continuously invest a pre-determined sum of money on a regular basis. If nothing else, it provides a huge psychological support while investing as it eliminates the stress and mental pressure of timing your transactions.
It is rightly said that when it comes to Mutual Funds, one should invest for time and not merely timing. Longer you stick around, better are the chances for higher returns.
- Ensures continuity
Equity markets tend to fluctuate often and are prone to volatility. This can induce investors to withdraw their money in a moment of panic when the markets crash. The probability of this happening with SIP mode is significantly lower as the risk/ investment is spread over a longer time period.
- Rupee Cost Averaging
SIPs allow the investors to invest at varying market levels. As a result, investors get more units during a bearish period which they can redeem at a high when the market is doing well. This helps to bring down the per-unit buying cost and is known as the benefit of Rupee Cost Averaging. Let us understand with a simple example.
Suppose that your monthly SIP contribution is Rs. 10,000.
Total units with the investor at the end of the year = 2950
If the NAV of the Fund again becomes Rs. 50 in the month of Jan (2019), then the total value of the portfolio would be Rs. 1.77 Lakhs (2950 *60)
Now, let us compare with a lump-sum investment of Rs 1.2 lakhs made in the month of Jan’2018. The investor would receive 2400 units and the value of the portfolio would have been only Rs. 1.44 lakhs
Even if the NAV of the Fund had gone down to Rs. 30 in Jan’2019, the value of the SIP portfolio would be Rs. 88,000 as compared to Rs. 72,000 in case of lump-sum investment.
- The “C” Factor
In the world of investment, the power of “compounding” is greatly valued. As we all studied in school, compound interest always generates higher return as compared to simple interest. With SIPs, you can earn returns on your investment as well as additional returns on these returns.
Last but not the least, SIPs offer investors flexibility. They can start with a contribution as low as Rs. 500. Additionally, schemes like Top-Up SIPs or Flexi SIPs allow the investors to increase or decrease their contribution as per their financial conditions. There are other options too such as perpetual SIPs, Trigger SIPs which can be considered.
So, a route which encourages people to start investing and continue the same over a long period of time is always preferred.
Remember the story from your childhood about the tortoise and the rabbit? Slow and steady wins the race. The same logic holds true for Systematic Investment Plans as well.
Now that you know that SIPs are your true friend when it comes to investing, what are you waiting for? Choose a fund and scheme that fits your pocket and is in line with your long-term financial goals. It is easy, quick and you can start with just Rs. 500. (That’s the cost of one pizza!)