Taking an investment decision for your future goals is a very critical decision as it deals with not only your hard earned savings but the volatility of the markets as well. In certain situations, an individual may find himself in a difficult situation where he has to decide on investing either a lump sum amount or an through SIP. Some believe in a myth where they consider lump sum investing as a risky decision and prefer to do SIPs. Let us understand this through an example –
Ms. Priyanka had invested an amount of INR 10 lakhs in equity based mutual fund Franklin Bluechip Fund on 1st Feb 2000 , the value on date is INR 73.35 lakhs. If the same amount invested through an SIP of INR 5000 for 200 months, the value as on date will be INR 61.89 lakhs. It clearly shows that in a long term point of view , investing in lump sum is more beneficial than SIP’s . Although it consists of higher risk of putting a big amount of investment but is well complemented by better returns . But this comparison would be like comparing Apples with Oranges as not everyone would be having lumpsum amount available for investments .
Lump Sum option should be chosen when you have adequate cash resources which are idle in a savings bank / fixed deposit and the Financial Goals for which you are planning should be well defined before initiating the investment. If you have short term goal of 1-2 years for paying down payment for buying a house, prefer saving in Debt funds which would be beneficial in terms of liquidity and returns.
When investing for long term goals start diversifying your investments in different asset classes available. For this, you need to have the right expertise or the right Financial Advisors who would help you manage your investments in a more effective way.
In case if an investor has only monthly savings for the investments and does not have a lump sum cash , then investing in SIP’ would be the only available option to invest. Investing through SIPs also helps you not to worry about market risks at the time of entry, as the investments would be done every month irrespective of market conditions. So the impact of market cycle is reduced, which means lesser risk but lesser returns too.
Sometimes investors, after looking at the market volatility, do not invest in lumpsum investments. They invest through Systematic Investment Plans (SIPs) by parking the lump sum cash in a liquid fund and then transferring the cash to the main fund It gives a sense of safety, but again one has to compromise on the returns in such a situation as there is a huge difference in returns if one applies this for a long term.