When it comes to an investment in mutual funds, you will find out that there are two options. Those two options are lump-sum investments and systematic investment plans, i.e., SIPs. Under a lump-sum investment, you are required to make a one-time payment for the investment. Regardless of the cost required for investment, you can only make a one-time payment. Systematic investment plans, on the other hand, function differently.
What are SIPs?
A systematic investment plan (SIP) is a mode of investment through which you get to allocate funds to mutual funds periodically, instead of investing the entire required amount of investment at one go like it is done in a lumpsum investment. SIP investment can be carried out either monthly, quarterly, or even semi-annually. After investing steadily in this manner, it might become simpler for you to meet your financial goals. When you opt to allocate funds through a SIP, you invest a fixed sum of money in a given period. Investing this amount enables you to purchase a certain number of fund units. In case you continue to do this for a long time, you get a chance to invest in the mutual fund during the highs and lows. After determining factors such as the frequency of allocating funds to the mutual fund scheme and the investment tenure, you can also choose to opt for the feature of standing instruction. Through this feature, you can opt to automate the payment for your investments. You can leave a standing instruction with your bank through which a certain sum of money is deducted from your bank account. Then the said money is transferred into your mutual fund scheme., Furthermore, while leaving the standing instruction, you also need to fix the date for the deduction, and money will be deducted only on the said date. Listed here are some of the benefits that are associated with systematic investment plans (SIPs):
- SIPs are flexible:
When you sign up for a SIP, you have the flexibility to choose things like the duration of investment, amount, and interval of the SIP payments. Furthermore, you also have the option to change the amount, pause or stop the SIP based on your financial situation.
- It is also possible for you to enjoy the advantages of compounding:
Allocating a portion of your income in SIP also allows you to take benefits that come with the power of compounding. Regular fund allocation in a scheme through a SIP can help you to enjoy the effects of compounding, meaning you earn interest upon interest as it is added to the original amount. This feature can be very beneficial for long-term wealth creation.
Is it possible to invest a lump sum on an already existing SIP?
Generally, in SIPs, the required amount of investment is already fixed. However, there are times when you may experience a windfall. For example, every month you invest ₹5,000 through a systematic plan. But recently, you experienced a windfall thanks to a bonus, you have ₹50,000 in your account. So, instead of slowly investing the extra ₹50,000, you can opt to invest the extra cash in a lump sum in your existing SIP. Yes, you read that right, you can invest in a lump sum in your SIP. However, before doing so, please make sure to remember some of these tips:
- Please remember to time the market:
If you opted to sign up for SIP for a large sum, you also need to time your entry into the market. For instance, the domestic market is currently experiencing a bear phase. In case your funds are invested during this volatile phase, then you may find the value of the portfolio has gone down by 10%. When there is a large amount involved and you see the value of your portfolio value down in a matter of a few days, it can be quite perplexing. However, there is something you can do to counter it. You can take the help of the market dividend yield ratios and market price-earnings (P/E) ratio. With their help, you may get a hang of the market valuations.
- You can also opt for STPs:
While a lot of people are aware of SIP, not many are aware of STP. Generally, a systematic transfer plan (STP) allocates a part of your fund to a money market fund. With the help of this plan, your funds have a chance to earn a higher rate of return.