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SIP vs lump sum investment: Which is the best way to invest in mutual funds?

SIP vs lump sum investment: Which is the best way to invest in mutual funds?

SIP vs lump sum investment: Which is the best way to invest in mutual funds?
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By Anshul  Oct 3, 2020 11:21:14 AM IST (Updated)

Systematic Investment Plan (SIP) and lump sum are two modes of investing in mutual fund scheme.

There are two modes of investing in a mutual fund scheme -- Systematic Investment Plan (SIP) and lump sum. While the former implies periodic investments (at a chosen interval) to average out one’s cost of investing, the latter indicates investing the available amount at one go in the chosen scheme.

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While choosing between both modes, investors should first consider their income and earnings.
According to Mohit Bhatia, Head – Sales and Marketing, Canara Robeco Mutual Fund, SIP mode is best suited for the category of mutual fund schemes that have historically exhibited high volatility in returns (for example equity and hybrid category) thus making it impossible to judge the relative price attractiveness, at any particular point of time.
Users can choose months or years for SIP investment as per their convenience and then allow the automated system to do the rest.
On the benefits of SIP, Bhatia says that it inculcates a disciplined investing habit that provides an opportunity to generate robust long term returns.
Prateek Mehta, Co-Founder, Scripbox, meanwhile, calls it an apt mode due to its rupee cost averaging feature.
“SIPs help in cutting through market volatility by continuing investment cycle when the market goes down or up, benefitting from both,” he adds.
On lump sum investment, Mehta says that investors with significant cash in hand can definitely go for it depending on their financial plan, investment goals and investment horizon. Even investors with a low equity allocation can choose to invest through lump sum investments.
Lumpsum investment, according to Bhatia, may be employed for sporadic cash inflows (that may have been received by an investor on account of intermittent encashed gains, profit from the sale of assets, yearend bonuses etc) into low volatility scheme categories like liquid or short-maturity debt mutual funds.
However, it is significant to remember that lumpsum investments can see significant volatility in the short term.
Nevertheless, SIP and lump sum investing are both worthy ways to set up the investment account.
Whether investing via lumpsum or SIP, it is important to understand that investments in market-linked products like mutual funds are best suited for investors who demonstrate habits of regular investing and patience across market cycles.
"History and power of compounding tell us that investing for longer horizons matters more than anything else, whether users choose to invest through lump sums or SIP," Mehta opines.
Disclaimer:
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