If you want to out money mutual funds, you will have to choose from two modes – Systematic Investment Plan (SIP) or Lumpsum investment. Let us find out which is the most suitable investment mode and when. It is not an easy task to pick one, as each mode has its own benefits. The main difference between lump sum and SIP is the cash flows. It is considered more desirable to invest in mutual funds through SIP as it inculcates financial discipline. But for debt funds, SIP is not suitable. Sounds confusing, does it? But it isn't. Read on to find out when is SIP investment more favourable and when lumpsum is recommended to avoid financial risks. Go for SIP investment to maintain financial discipline. Lumpsum investments require a manual investing decision at the time of every investment. However, if you choose to invest through SIP, the investing actions are automated, all you need to do is post the one-time registration of SIP. Regular investments through SIP will enable you to inculcate a sense of financial discipline and help you maintain a decent pace in your investing journey. Invest in SIP if you want to avoid the issue of market timing When the market is down, SIP can get you more units by lowering the average cost of investing. It can yield higher long-term returns. So it becomes clear that SIP investments are least affected owing to rupee cost averaging. Moreover, you don’t have to fret about the market volatility while investing through SIP mode. Opt for SIP if you want flexibility You can stop, pause, alter the amount and also withdraw any amount if you invest through SIP. You may even choose small amounts such as INR 500 to invest in mutual funds. Lumpsum is suitable for investing in debt mutual funds Lumpsum investment suits investors who wish to invest in debt mutual funds for the short term. It is pointless to invest in debt mutual funds through SIP. The lumpsum mode is more suitable because the recommended horizon for debt funds is less than three years. Lumpsum investment is ideal in a rising market In a rising market, a lumpsum investing approach tends to do well. But what if the market falls? Well, there is a solution for that too. You can always go for a Systematic Transfer Plan (STP). An STP involves the regular transfer of money from another mutual fund and not your bank account. Invest in a debt fund instead of keeping the money in a bank because it has the potential to earn higher returns than a savings account. Select a short-term equity fund, and debt fund to do an STP in the same fund house. It will enable you to instruct the fund house to change an STP into an equity fund of your choice. Thus, choose lumpsum or SIP for investment in mutual funds based on your investment objectives.
