The terms ‘mutual funds’ and ‘SIP’ are almost synonymous for people when looking into investing money. Mutual funds often end up being the favorite place to invest their money and SIPs are looked at the right tool to do so. This is because it is one of the easiest ways to invest your money. Your investments are made in installments at regular intervals of time until the maturity period of the fund. However, believing that SIPs are the only good way to make mutual fund investments is a very one-dimensional approach to the process.
If you have a lot of extra money that might not have to be used in anything else, you can invest it into mutual funds in one go. While this depends on the situation of the market, you can avoid the longer route of SIPs. The trouble of having enough money every month to invest due to your commitment to the fund can be exhausting at times. Hence, it may be better to invest all you want at once and just sit worry free. However, a lump sum investment has its own risks and requires a great deal of careful thinking before investment.
Why choose one over the other?
Before the debate of which option out of SIP and lumpsum investment even begins, the bigger question that most people have is why the debate needs to happen in the first place. Many newer investors believe whichever way you invest, the money goes into mutual funds. Hence, the confusion about which one to choose seems pointless to many. However, that is not true at all.
The key differences between the two is the risk associated with these investment methods and your ability to invest. With SIPs, you do not have to procure a large sum of cash at once. You can simply keep on investing smaller amount at regular intervals. However, this is highly dependent on your ability to religiously invest when you have to. If you fail to invest at too many intervals, your investments can face irregularities.
On the other hand, with a lumpsum mutual fund investment, you have to invest a large amount of money at once. While not a lot of people have a big amount of money just sitting with them, the ones that do can benefit from it. Once, you have made your investment, all you have to do is to wait and watch your funds perform. This eliminates the risk of lapses in investment. However, there are still a few factors to consider before you make a lumpsum investment.
Factors to consider
As an investor, you must consider the following factors before making a lumpsum investment:
Market timing
Investment is all about opportunity. This is especially the case for larger investments like lumpsum mutual fund investments. Since, you are parting with a large amount of your money, you have to be as sure as you can that it will get you the return you wish for. You have to make sure that you make the investment at the right time.
Diversify
Just because you are investing a large amount does not mean that you have to invest all of it into one avenue. Hence, when you make a lumpsum investment, it is better to divide your money across different mutual funds schemes. Moreover, do not shy away from investing with different mutual fund houses. This minimizes and sometimes eliminates any losses that you might have.
Your financial goals
Investing does not have a set path to high returns because it is done with different goals in mind by different people. Hence, your investment plan should be according to your financial goal. Hence, you need to check whether lumpsum mutual fund investments fit into your financial goals. If they do, you need use these goals to allocate your money in different funds smartly.
Tax impact
The basic idea of making investment is to take your gains and deposit them right into your bank account. However, money from any source qualifies as income. And depending on the fine print of income tax policies, tax needs to be paid on your gains. Hence, to make sure that paying tax does not deplete your returns, you have to plan your investment taking tax impact into account.
Time to redeem
If you have ever cooked before, you know there is only a limited time that your food should spend on the stove. You remove it too quickly, it’ll be raw. If you remove it too late, it could be overcooked. Both of those situations don’t do you any good. The same applies to lumpsum mutual funds investment as well. Know what the objective of your investment and redeem your gains once you have fulfilled it. Happy investing!
Hey, this is Johny Sehgal. I am the owner and caretaker at Finance Jungle. I completed my education in BSC and now heading towards the digital marketing industry. I usually have interests in reading, playing games and watching movies. I also love to write content based on quality information. The main motive of mine is to provide the top and best quality information to my readers. Finance Jungle is the blog for the same.
