SIPs vs Lumpsum: What is the best investment strategy | Motilal Oswal

SIPs vs Lumpsum best investment strategy

Mutual funds are a popular choice among investors. Mutual funds are professionally managed funds that not only diversify the risk but also provide consistent long term returns. You can invest in a mutual fund in two ways - a lumpsum amount or a systematic investment plan (SIP). 

A lumpsum investment is a one-time bulk investment in a mutual fund scheme. Whereas in a SIP investment, a fixed amount is invested weekly, monthly or quarterly.
While both investments allow investors to benefit from wealth creation, SIP might be a better choice for you. Let’s look at some reasons why SIP is a better choice.

1. Inculcates good financial behaviour

The biggest advantage of SIPs is that it inculcates good financial behaviour. Many investors approaching retirement often regret not being disciplined with their finances. SIPs by virtue of being periodic investments in a way forces the investor to be disciplined. According to your commitments, you may choose to invest 20% of your monthly salary in a SIP or more. Once your SIP money is deducted from the salary you don’t have to worry about the rest of your money being wasted. You would have already invested a small chunk of money in a SIP.

2. Rupee-Cost Averaging

Rupee-cost averaging is another great benefit of a SIP. A market goes through various cycles of ups and downs. A SIP helps you to invest across various market cycles. When the market is up, you end up buying fewer units. Similarly, when the market is down, you end up buying more units. In the long term, SIP helps you to tide over market fluctuations. 

3. Power of Compounding

Like any other asset class, a mutual fund SIP over the long term can help you get good returns. Since a SIP is a periodic investment, the returns are automatically reinvested in the market. Over the long term, a SIP can help you tide over market cycles as well as get you good returns.

4. Ideal for new investors 

Another benefit of a SIP is that it is ideal for new investors. Through a SIP investment, even a young professional with a monthly salary of 10,000₹ can invest 500₹ per month and benefit from long term wealth creation. Gradually as the salary increases, the amount of SIP can also further increase.

5. Investors don’t have to monitor the market

As we already discussed, markets go through various cycles. An investor who has invested their money may feel the urge to keep checking the market so as to safeguard their money. However, in a SIP, since it’s a periodic investment, an investor doesn’t have to monitor the market on a regular basis. The investor invests in the SIP regularly across market cycles to benefit from long term wealth creation.

The world’s most famous investor, Mr Warren Buffett said “We don’t have to be smarter than the rest, we have to be more disciplined than the rest.”
A SIP enables you to be more disciplined than most people around. So review your financial goals and get started on your SIP mutual funds journey as soon as possible.

Related Aritcles:

How to Analyse Mutual Funds for Big Returns | Things to Know Before Investing in Mutual Funds | Mutual Fund - Need of Financial Plan | How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account 

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