Monday, February 14, 2011

Should you invest in SIPs or lump-sum options?

With the investment habit catching up in India, mutual fund (MF) houses are scrambling hard to take advantage of growing investor interest. Campaigns promoting MF products offer a glimpse of trends that fund houses tend to focus on. The latest addition to this is the increasing focus on systematic investment plans, or SIPs, which offer investors the option to invest a small chunk of their savings in MF units on a regular basis. The SIP option was always available along with the other options of lump-sum investments.

However, fund houses have raised their sales pitch on the SIP turf in the past few quarters. One reason could be because SIPs tend to offer a more disciplined method of investing for those who have just started looking for avenues beyond fixed deposits of banks. SIPs also expand the reach of MFs to those who cannot afford to invest lump-sums of money at one go.

But does this mean that SIPs can be viewed as a one-size-fits-all option? What about the fact that a lump-sum investment tends to provide a higher sum on maturity compared with SIPs? But then can one ignore the flexibility SIPs offer to investors when the stock market is choppy? That seems to be enough fodder for confusion. One way to settle this would be analyse the criteria to choose between the two options. ET Intelligence Group helps you to choose between SIPs and lump-sum options that suit your investment needs. There are two investment options for someone who wants to put money in MFs: SIP and lump-sum payments.


This means investing the entire sum of money at one go. For instance, if you have Rs 1 lakh which you are willing to fully invest in stocks or MFs, it is a lump-sum investment.


Popularly know as SIP, it is one way of building a corpus steadily. It is similar to a recurring deposit (RD) with the post office or a bank where you stash away a small amount periodically. The investment is spread over a certain time frame. The fund units are allocated according to the prevailing net asset value, or NAV, on that day of the month. You get more number of units if the NAV is low.


Ideally, the lump-sum option proves to be beneficial when the long-term trend in the economy is positive. On the other hand, SIPs offer a smart option at a time when the markets are sliding since investors can buy more units without increasing the periodic outgo. Further, the risk is lower since only a small portion of savings is invested periodically. However, the stock markets often fluctuate wildly and hence making the choice between the two payment modes can be difficult. One way of sorting this out is to consider the period of investment.


It may not matter which option you select as long as you are investing in large-cap and multi-cap funds for the long term. This is because SIPs do not necessarily generate better returns than lump-sum investments. Our study shows that returns from both SIP and lump sum are almost the same. This is because, in the long run, time value of money tends to average out the risk. For instance, the monthly SIP return of Reliance Regular Saving Equity , a large-cap fund, over five year is 25% at an annualised rate. 

Source : ET 

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