In order to make your investments, you can choose SIP or lump sum method. The method you choose can have an impact on your profile.
Read on to understand which method is better.
While you need to pick the right investment instruments to achieve your goals, choosing the right method is also important. Primarily, there are two methods- SIP and lumpsum. Generally, mutual funds are one of the most popular investment options that offer these investment modes.
What are SIP and Lump Sum Methods?
SIPs allow you to invest in an investment instrument on a regular basis. You can invest by opting for frequency, such as monthly, weekly, daily, etc. Your money will be invested in the scheme based on the frequency you choose.
For instance, if you choose to invest an amount on a specific date of every month, then the money will be directly invested in the funds opted by you on that date.
The other method is lump sum investment. Unlike the SIP method, which allows you to invest money on a regular basis, in the lump sum method, you need to make the entire investment in one payment.
SIP and Lump Sum- What’s the Difference
As both methods allow you to earn good returns, choosing the right one can help you significantly. Let’s understand what differentiates them-
- KeepingTrack of the Market
In order to make lump sum investments, you need to have a great knowledge of the market. Hence, you need to constantly track the market to know the right time to enter the investment. Furthermore, lump sum investments can be helpful when the market is low.
In case of SIP, you can enter the market during different market cycles. You will not have to track the market constantly as there’s no need to make an accurate entry into the market. Furthermore, you can accumulate sufficient funds by investing in a savings plan.
- Averaged Costs
As lump sum investments require you to make a single payment, you need to know when to enter the market. In order to make profits, it is recommended to make the investment when the market is low and exit when the market is high. However, in case of SIPs, you can enter the market during different cycles. Therefore, the cost per unit is averaged out during the investment tenure.
Less number of units purchased when the market is high will be averaged out against more number of units purchased when the market is low. It can help lower the impact of the market.
One of the most important benefits that SIPs provide is diversification. You can easily diversify your investments by investing in different mutual funds to gain more returns while building a stable portfolio. However, in case of a lump sum investment, all your money is invested in one fund.
- Long-Term Investment
Both SIPs and lump sum investments are great options if you want to invest for a longer tenure. You can choose funds based on the returns you want and stay invested for a longer term to achieve the goal.
Choosing Between SIP and Lump Sum
SIP and lump sum both are great options. You need to select an option based on your requirements.