SIP investments are the most popular modes of mutual fund investments in India. They offer key benefits like rupee-cost averaging to investors and are very affordable too. Why, then, do certain investors opt for the lump sum mode of investment? The lump sum mode, too, can be extremely beneficial for a particular category of investors.
SIP vs lump sum: What is the lump sum strategy and how is it different from SIPs?
Since SIP (systematic investment plans) investments are more popular, you can understand lump sum investments better in the context of SIP investments. Unlike SIPs, lump sum investments do not require investors to invest money regularly in mutual fund schemes in fixed amounts. The investor invests all of the investment capital as a lump sum in one go. Here are the key differences between SIPs and lump sum investments:
- The money is invested in different modes: The key difference between SIPs and lump sum investment is that they function as separate modes of investment. Money is invested in a mutual fund scheme at one go using the lump sum mode, whereas the SIP mode helps investors invest money in installments.
- Lump sum investments are better suited for experienced investors: SIPs are designed for first-time investors or investors who do not have a lot of experience in mutual fund investing. This is also why SIPs help investors invest an amount as less as ₹500 monthly, it is to make mutual fund investing more convenient for inexperienced investors. Lump sum investments, on the other hand, are more suitable for seasoned investors who have a large investment corpus that they wish to invest for a fixed period.
- The investment duration is fixed: SIPs can be discontinued as per the will of the SIP investor, but this isn’t the case with lump sum investments. Lump sum investors generally fix an investment horizon before investing in a mutual fund scheme.
Benefits of choosing a lump sum strategy for mutual fund investments:
Here are the key benefits of choosing a lump sum strategy for mutual fund investments –
- Lump sum investments are ideal for investors who wish to invest in the long term: Experienced investors who wish to invest in the long term generally adopt the lump sum strategy while investing in mutual fund investments.
- They are more convenient investment modes than SIPs: If you opt for an SIP mode of investment, you must worry about investing a fixed amount regularly. While this procedure is now automated and very convenient, you can completely avoid this hassle by investing your entire corpus in one go. Lump sum investments are more convenient from this perspective.
- They offer substantial growth to the investor: The lump sum mode offers considerable growth, especially during bullish market phases.
You must assess your ability to understand the market and develop immense patience before investing in a mutual fund scheme through the lump sum mode. It is also advisable to assess your liquidity-related preferences and calculate your potential returns in the medium-to-long term before investing a lump sum amount.
