SIP vs MUTUAL FUND- Which is better? Know the difference

The penchant among Indians towards real assets – gold and real estate – is fast losing favour with a significant rise in financial assets held by people. However, we live in highly uncertain times, which can best be held by Mutual Funds investment. The best way to create wealth is to invest in Mutual Funds. Now, what exactly is ‘Mutual Funds’ – Mutual Fund, for instance, is an investment vehicle professionally managed by the Fund Manager for the purpose of wealth creation from securities such as stocks, bonds, money market instruments and similar assets.

But, here arises the decade after decade old question – which approach is best for Mutual Funds investment – investing through Systematic Investment Plan (SIP) or through lump sum investment?

Now that you’ve decided to invest in a Mutual Fund, the above mentioned question is very crucial. This depends on your financial goals and your ability with your cash flow. If you don’t have a larger amount for the investment, SIP would be beneficial for you.

Even if you choose to invest the same amount of money using these two different investment methods – for instance, 3.6 lakh on 1st April or 30,000 a month for 12 months, the results may vary due to amount of money exposed to the market. This concept is known as rupee cost averaging.

Any dream can be achieved if you work towards it. Building long-run wealth is no different.

Lump Sum and Its Basics

Basically, if you have a larger amount in your bank which is to be invested, what would you do? I’m pretty sure your answer would be – “Take entire amount and invest somewhere from which I can generate wealth and get multiple benefits.”

So, that “investment of entire amount” is what Lump sum investment is. Your entire corpus would be invested in a one go if you choose lump sum investment option. Lump sum investment attracts market risk for a shorter duration. If you have an appetite for longer time horizon, then it is ideal to invest in Lump sum. The minimum time horizon that you must keep in mind before investing in Lump sum mode is 10 to 12 years. Hence, your cash flow, goals and responsibilities matters are to think about before investing Lump sum in Mutual Funds.

Systematic Investment Plan and its Basics

A Systematic Investment Plan can help you work towards your long-run financial goals through regular systematic savings. These goals can be your retirement, children’s education, a dream home or even a dream vacation.

Let’s know the basics of systematic investment plan first and see how it can help you fulfil your investment objectives –

Investment Amount Under SIP

SIP is a simple, convenient and affordable way to invest for your future with as little as Rs.500 every month. You have to regularly invest the same amount every month at the prevailing Net Asset Value (NAV) subject to applicable load. Basically, SIP offers flexibility for people with fixed incomes and vision for wealth generation.

SIP WORKS on Rupee Cost Averaging

With SIP you minimise your exposure to stock market volatility. Through an SIP, you get an advantage of investing in regularly in the stock market without worrying about bull and bear phases. By investing a fixed amount of money, you may be able to gain more units when the prices are slowing down and vice versa. So that, over a period of time, the acquisition cost of per unit may come down and this is what is known as Rupee-Cost Averaging!

Power of Compounding

Albert Einstein once said, “Compound Interest is the eighth wonder of the world. Those who understand it, earn it. Those who don’t, pay it.”

And trust me, he was absolutely RIGHT! Even Warren Buffet agrees. The power of compounding is beautiful, the sooner you invest, the more money you have in future. You can say, compounding is your true best friend, only and only if – you’re disciplined with your investments. Systematic Investment Plan (SIP) is the most effective way to overcome the market phases, and benefit from the beautiful power of compounding over time.

So, it’s you who decides – whether to a person who earns it or to be a person who pays it! It’s you who can finance your future dreams through SIPs.

Disciplines all Way

With your money turning the better results over time, they also make you disciplined with your savings. They help you inculcate a regular saving habit as they require your attention every month with certain fixed amount.

Finally, SIP or Mutual Funds?

If you don’t have an investment in mutual funds; then it’s about time you join more than one crore smart Indians who are doing their investment in equity mutual funds. Regular investment over longer term is the most simple and effective way of creating wealth in a growth market like India. If you are a part of the one crore smart Indians doing SIP, then consider an SIP top-up if your income has increased more than your SIP amount or smart SIP to take advantage of market volatility. But, if you have lump sum cash in hand, lump sum investment option would be great for you.

The point here is – INVEST and GROW your wealth over time.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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