Apart from wealth creation, one of the good things about the stock market is that there are more ways than one to invest in it. You can choose to invest in a single stock, in multiple stocks of your choice, or in mutual funds, where the basket of stocks is already chosen for you.
And it doesn’t stop there though. You also have the freedom to choose the mode of investment as well. For instance, you can invest your capital all in one go or in periodic instalments spread out over a specific time period. But then, what’s the better option of the two? Should you go for an all-out lump sum investment or choose to invest a fixed amount regularly? Continue reading to find out.
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Understanding lump sum investments
Now, in a lump sum investment, you invest all of your capital in a stock or a mutual fund in just a single transaction. Upon investing all of your capital in the asset of your choice, you simply sit back and wait till it reaches your intended target, at which point, you sell your investments for a profit.
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Understanding SIP investments
A Systematic Investment Plan (SIP), on the other hand, is a stark contrast to a lump sum investment. In an SIP, you invest a predetermined sum of money periodically for a certain period of time.
By investing regularly in an asset over a long period of time, you can successfully tide over volatility. That’s not all. An SIP also tends to reduce your overall cost of investment through rupee cost averaging, giving you much better returns in the long-term.
Let’s compare both lump sum investments and SIP investments head-to-head to find out the differences between them both.
Lump sum
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SIP
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Lump sum investments require you to monitor the market closely for both entry and exit points.
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You don’t have to monitor the market as closely with SIP investments.
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These investments require large amounts of capital.
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You can start an SIP by contributing as little as Rs. 500 each month.
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There’s no effect of compounding on lump sum investments.
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The dividends that you earn from SIP investments are reinvested, thereby giving you a compounding factor.
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Lump sum investments don’t inculcate financial discipline.
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Since you will be required to invest regularly till the end of the tenure, SIP investments inculcate financial discipline.
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Which one is the better option for you?
To put it simply, the answer to this question lies with you. Now that you know the differences between lump sum investments and SIP investments, the choice between the two rests with you.
Here are a few of the factors that you should consider when determining the option that suits you and your financial requirements the best - your amount of investment, market timing, and type of asset class that you wish to invest in.
For instance, if you have access to a large sum of money, lump sum investment may be the right option for you; if not, SIP may be the right way to go.
And similarly, if you’re technically and fundamentally sound with the concepts of stock trading and are in a position to identify the right market timing for entry, lump sum investments can give you an exceptional return on your investment. On the contrary, if you’re a beginner with not much experience or knowledge, SIP investments are the perfect way to go.
Finally, if you’re planning to invest in equity, SIP may offer you better returns since it can deal with the increased and wild volatility associated with it. On the other hand, if you’re planning on investing in debt funds, a lump sum investment shouldn’t hurt you since they’re not very volatile to begin with.
So, remember to take all of the above factors into consideration along with your financial goals to determine the investment method that’s right for you.
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