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Lump sum investment or SIP- The better option for beginners

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The world is waking up to India’s demographic potential and the country’s millennials and Gen Z are showing keenness to make early investments to build their dreams. The number of new investors in the capital markets is growing exponentially, thanks to better internet accessibility and awareness about the markets. More and more Indians are signing up for systematic investment plans (SIPs) and lump sum investments through mutual funds, among others, and yet they are seeking guidance about the best possible investment option for structuring their portfolios. The plethora of choices available today in the market can lead to indecision if the investor isn’t sure about his mutual fund investment options.

A perennial question that persists for first-time investors and beginners concerns their decision over which instrument to pick at the start. There is confusion among many whether investing in a lump sum or going for SIPs is the better option. The fact remains that both serve several purposes, and the decision must be made based on the objectives they wish to achieve.

Understanding Lump sum investments

Those who are unsure about committing to a periodic or monthly contribution towards a plan usually look at lump sum investments into mutual funds, as it is a one-time transaction. Such investments require a significant amount of capital to see the market provide sizable returns.

The lump-sum option is usually chosen by investors who are not averse to risk, as they look to the markets for generating a higher proportion of returns. It requires a degree of knowledge in understanding the dynamics of the system, as people prefer to put their bulk money into mutual funds when indices are trading lower. It is considered an ideal option for investors who receive high but irregular income. Professionals involved in managing businesses and consulting roles often get paid in terms of fees and contracts, and SIPs do not cater to their interests. Consequently, such irregular cycles are more suitable for lump sum investments.

The case for SIPs

When it comes to SIPs, the instrument follows an incremental investment process that takes the average capabilities of the investor into account. Individuals with a monthly income can decide to contribute to SIPs regularly in a stipulated period. It could be on a daily, weekly, and monthly basis, starting from the base amount of INR 500 to several thousand. The process is similar to opting for a banking service, where the pupil knows how much he’s contributing to the service, as they sign up for a pre-decided period. The asset value accumulates over time since it stacks up from the time of the first investment.

As a majority of first-time investors are young professionals and recent graduates, SIPs are a great option to pursue. Their investments remain low, requiring a basic level of financial commitment. Moreover, they can be organized on a goal-oriented timeframe, without worrying about market fluctuations. Add to this the option of adding the interest generated from the SIPs, back into the scheme, which helps investors increase the chance of generating even better returns.

 

What to keep in mind before investing and how to go about it

As already mentioned, it is essential to set certain objectives before an investor chooses to go for one option over the other. For instance, it depends on how much capital the investor is willing to invest, the form of income generated by each individual every month, an investor’s risk tolerance, and their expertise in deciphering the market dynamics.

For individuals with a steady income, it is believed that SIPs play a role in withstanding the see-sawing indices, requiring little attention on the part of an investor. It is an ideal proposition for beginners with regular income, as they can also choose to end it anytime. In addition to this, banks are helping their customers speed up the process through digital KYC and other means, and through your initiation on a mobile app, it gets invested systematically based on the scheme you choose. On the other hand, lump-sum investments during market lows can significantly impact future returns, and the risk factor plays a major role. Whether it is SIPs or lump sum money, the idea is to head towards diversification of ones’ portfolio, so that risks are eventually hedged.

By Mr. Jyoti Roy – DVP- Equity Strategist, Angel Broking Ltd