A survey report by Motilal Oswal AMC reveals how investors prefer putting money through systematic investment plans (SIPs) over lump sum investments. The data used to assess investors’ behaviour reveal how three in four respondents prefer to invest using SIPs, underscoring the importance of disciplined investing for wealth creation over the long investment tenure.
Choosing the right payment method is crucial
The choice to invest also entails major know-how of how to invest and decide whether to invest in a lump sum or gradually over a period through small installments.
The interplay between payment methods and financial planning is evident.
Increasingly, the “SIP” method is gaining popularity, particularly among youthful and less experienced investors who are aiming to accumulate funds for purposes like retirement, homeownership, or higher education.
Essentially, this approach entails a consistent investment of a fixed sum of money at regular intervals, be it monthly or quarterly. This gradual and steady approach aids investors in accumulating funds even with modest investments per instance, while also providing a buffer against the effects of market volatility. By investing at various times over an extended period, investors can mitigate the impact of market fluctuations.
However, proclivity towards the SIP approach does not imply that investors are averse to putting their money in lump sums. The “lump sum” method is equally popular with some investors inclined to push in a large capital during extreme market downturns or a prolonged bearish phase.
Why invest through SIPs?
Many people initiate their investment journey through the SIP method hoping that the small chunks of money put in will help them garner interest. The compounding effect then begins over the period with interest being earned on the interest income, thus, helping to yield a decent corpus after a period.
Within the framework of SIP, you have the opportunity to engage with mutual funds through a staggered approach, involving consistent investments of even a modest sum, such as ₹500, on a regular basis, typically monthly. This method has garnered significant traction among Indian investors due to its facilitation of “Rupee Cost Averaging” and its capacity to encourage disciplined investment practices, alleviating concerns related to market volatility and the intricacies of market timing.
The SIP method serves as an excellent choice for novice investors, allowing them to commence with modest sums and incrementally develop their investment portfolios. Moreover, it suits those investors who harbour specific financial objectives, such as retirement planning or saving for a home down payment.
Here are several advantages of incorporating the SIP method into your financial planning:
- Gradual and consistent savings: Regardless of your available funds, the SIP method enables steady and incremental savings. Through regular fixed investments, you can accumulate wealth over time.
- Risk reduction through market volatility: By consistently investing fixed amounts at regular intervals, you distribute your market entry points. This strategy safeguards against potential losses during market downturns.
- Flexibility in investment: Tailor your investment approach according to your preferences. Adjust the invested amount and frequency to align with your evolving financial circumstances.
- Cost-effective strategy: Most SIPs come without commissions or fees, making it a budget-friendly investment choice.
For those seeking an uncomplicated and efficient approach to achieving their financial aspirations, the SIP method presents a highly viable option.
Why invest your money in a lump sum?
Lump sum investment involves a singular infusion of substantial funds into a mutual fund, typically undertaken in instances of financial windfalls like bonuses, inheritances, or lottery winnings.
This approach can be advantageous for those seeking to capitalize on market fluctuations. During market downturns, lump sum investors can acquire shares at reduced prices, potentially yielding greater long-term returns.
However, lump sum investments come with inherent risks. Sudden market declines following the investment could result in losses. Moreover, a high-risk tolerance is essential for lump sum investors, given the need to effectively time the market.
Here are further pointers for lump sum investors:
- Embrace diversification: Allocate funds across diverse mutual funds representing various asset classes—equity, debt, and money market funds—to mitigate risk.
- Commit for the long term: Lump sum investments align well with long-term goals, allowing for potential recovery from short-term fluctuations.
- Conduct thorough research: Before committing, conduct comprehensive research to comprehend associated risks. Seeking guidance from a financial advisor offers tailored insights.
Facing a two-pronged decision
When embarking on their investment journey, mutual fund investors often encounter a dual-pronged choice.
They must select between two distinct investment approaches: The SIP method involves regular investments of a fixed amount at specified intervals, such as monthly or quarterly. Lump sum investments entail investing a substantial sum of money all at once.
Determining the optimal investment approach hinges on an investor's individual situation and financial objectives. Nevertheless, several overarching factors merit consideration during this decision-making process.
- Investment amount: Limited funds may lead to favouring SIPs, allowing gradual portfolio growth from a modest outset.
- Investment horizon: For long-term goals, SIPs often excel, as they help spread the investment's cost across time.
- Risk tolerance: Risk-averse investors may lean towards lump sum investments, capitalizing on potential market entry at lower prices.
- Market conditions: In times of market volatility, lump sum investments could hold advantages, capitalizing on potentially lower asset valuations.
In the end, the choice between SIPs and lump sum investments remains personal. Thorough contemplation of individual circumstances and financial aspirations is crucial before reaching a decision.
Ultimately, the decision to opt for lump sum investments or SIPs is highly individual. A prudent approach involves thoughtful evaluation of personal circumstances and investment objectives.