Capital vs SIP, which FCP suits you best?

Mutual funds are professionally managed investments in which fund managers pool funds from multiple investors and buy diversified securities. The two main payment methods in any mutual fund program are the “lump sum” and the “systematic investment plan”.

“For goals like retirement that are more than 10-15 years away, it is possible to consider using lump sums or SIPs depending on cash flow and availability of the corpus. For investors investing for less than 10 years, SIPs/STPs are preferable. The type of mutual fund also has an important role to play, for example, lump sums in balanced advantage funds / dynamic asset allocation funds and debt funds may not require SIPs, while that investing in equity funds – domestic or international can best be done through SIPs to gain the advantage of Rs Averaging,” says Vishal Dhawan, Board Member of the Association of Registered Investment Advisors (ARIA).

So which method is right for you? To find.

Lump sum

The lump sum investment method is how an investor invests a large sum of money in a single payment into a mutual fund program. Lump-sum investments are preferred by investors with a large discretionary budget and good risk tolerance.

Benefits of investing a lump sum in mutual funds:

Convenience: Pay only once and you won’t have to pay again and again.

Suitable for people with irregular incomes: This method of payment is well suited for people who do not have a fixed or regular source of income.

Long-term ideal: It has been observed that stock markets around the world have seen a general upward trend, so keeping this in mind, lump sums are favorable for long-term investments.

Disadvantages of investing via the lump sum method in mutual funds:

Market uncertainty: Lump sum investments are sensitive to market timing. Investors could be at a loss if markets fall after investing their lump sum

Not ideal for small investors: Since small investors may not have significant capital, the lump sum approach is not ideal for them.

Not ideal for the short term: Due to market volatility, the lump sum approach is not ideal in the short term.

Systematic Investment Plan (SIP)

Whereas, in a Systematic Investment Plan or SIP, investors make regular and equal contributions to a mutual fund over a long period of time. This method of investing in mutual funds is often chosen by risk-averse investors.

The benefits of investing in SIP:

Average cost in rupee: Unlike a single lump sum transaction, the rupee cost averaging technique reduces the average cost of the investment over time.

Small quantity required: Investors can start with small amounts and don’t need to invest huge sums to see huge returns.

Reduced risk: In the case of SIPs, since small investments are made over a long period of time, the exposure to risk is relatively less.

The disadvantages of investing in SIP:

Inconvenience: Investors must constantly continue to invest fixed sums of money, this can become a disadvantage.

Not ideal for the growth phase: If investors launched an SIP during a market boom, profits would continue to steadily decline.

Not suitable for people with irregular incomes: This form of investment strategy is not suitable for investors with irregular sources of income as recurring deposits of fixed amounts are made.

Dolores W. Simon