Mutual fund is increasingly becoming preferred choice of investment for many investors in India. It offers various choices and benefits to suit the needs of different investors. Mutual fund investors can invest through two ways viz. lump sum investment and systematic investment plan (SIP).
A lump sum investment is one where the entire amount is invested in one go into preferred mutual fund. On the other hand, in case of SIP, a fixed amount is invested in mutual fund at regular interval. The question therefore arises which method is better and why should prefer it.
The amount of money that’s needs to be invested and when it can be invested depends on your current income, expenditures and your financial goals. If you earn regular income, SIP can be your suitable option. You can save certain part of your salary regularly and invest in SIP every month. With this you will invest when the market is both at high level as well as low level and thus your purchase cost will average over a period of time. However, if your future income is not certain and you have good amount in hand such as bonus, accumulated savings etc., you can invest the entire amount in mutual fund.
When you decide to invest a lump sum amount in mutual fund, it is important that you invest when the market is at low level so as to get good gains. The idea here is to buy when the valuations are cheap and sell it at high. You might have to wait for a long time for the market to reach your preferred level for investment. There is also a need for good knowledge of market and stock valuation to understand the market behavior. In SIP there is no need to time the market and it will still give you good returns over a period of time as there is disciplined investing despite market volatility.
If you have big amount in your hand such as from the sale of an asset, the advisable option for you will be to first park your corpus in a liquid fund and start Systematic Transfer Plan (STP) to periodically transfer certain amount in equity fund.
A good combination of lump sum and SIP in your portfolio will also give a boost to your returns in long term. The key to any mutual fund investment is to invest and then stop worrying about it. Whether you invest through lump sum or SIP, your investment will need time to grow and giver reasonable returns. Buying or selling on impulse will do you more harm than good. Also, remember to track the performance of your fund every year and ask your financial advisor if any changes needs to be made.