helps in wealth accumulation by applying the power of compounding to your investments
One of my earliest childhood memories revolves around playing cricket in my neighbourhood. We played each game as seriously as an international tournament, and each ball posed an inevitable dilemma. I was a capable batsman for my team, and raking up a decent score was part of my responsibility. Every time I faced a ball, I would ponder on whether I should hit it for a single and play safe or go all out and hit a six?
Each option offered different benefits and posed equal consequences. There was either euphoria or fear of possibly being bowled out, thereby losing the match for my team. Over time, I decided that the only way to play and enjoy my game was to take each ball as it comes and let my batting depend on my need and expectations at the time.
When I started investing, I found several similarities between my game of cricket and mutual funds. Mutual funds are market-linked investments that offer much-needed diversification and risk management. Mutual funds refer to a collective pool of money from several individuals that is invested in financial instruments such as stocks and bonds. As they are professionally managed, mutual funds are low risk and optimal for investors who are not proficient in financial investing. As an investor, you partake in gains and losses of the fund in a manner that is directly proportional to your investment.
Mutual funds are an essential investment in current times of volatility, where returns tend to fluctuate frequently. Investing in mutual funds allows an investor to consider and leverage several asset classes, including debt and equity. Depending upon the investment horizon and risk appetite, an investor can select the best mutual funds that fit their investment needs.
However, the question remains – Do you invest in mutual funds in one go, i.e., as a lumpsum investment or through bite-sized investments by leveraging the Systematic Investment Plan (SIP) route? Each approach offers unique advantages and disadvantages. To understand what works for you, you will need to dive into the differences of each and choose what best suits your investment strategy and financial goals.
A Systematic Investment Plan is akin to your EMI payments. It is a systematic approach to financial investing. It involves setting aside a fixed amount of money to be invested in the markets at regular intervals (usually every month). A SIP allows you to decide and allocate a specific investible corpus and take advantage of market downturns as current market prices determine every unit’s price.
Investing in SIPs allows you to invest without affecting other financial needs or commitments. It helps in wealth accumulation by applying the power of compounding to your investments. Compounding is an effective strategy that makes your money work for you. Compounding is beneficial for long-term investments as it considers the interest earned on your investment and interest accrued over time as applicable.
SIPs also help you take advantage of rupee cost averaging as you invest monies at fixed intervals. This enables you to buy more units of your preferred mutual fund when stock prices are low and vice versa. As you consistently invest at regular intervals, you benefit from market movements without dealing with market complexities and protect yourself from market cycles.
Lumpsum investments work best when you have a sizeable surplus of funds that you wish to invest. Lumpsum investments are usually made in a single mutual fund. Such investments are beneficial when market valuations are low and when you have some extra capital to invest. Veteran market investors prefer lumpsum investments as they have the necessary expertise and knowledge about market movements. Also, lumpsum investments work best when you stay invested for a longer time horizon as it allows compounding to take effect. If you can invest lumpsum assets in multiple mutual funds, you can also reduce risk and take advantage of any market rally that ensues.
In addition to mitigating the impact of market volatility, SIPs eliminate the need to time the market. On the other hand, lumpsum investments allow you to take advantage of any market lows that may occur. However, you need requisite knowledge and experience to follow market moves closely to take serious advantage. SIPs also need minimum investments starting with Rs 500 per month. Lumpsum investments, however, need a minimum corpus of Rs 5,000. As lumpsum investments are one-time, they do not require or inculcate financial discipline, which SIPs do.
As an investor, diversifying your investment in mutual funds by including both SIPs and lumpsum investments as part of your financial portfolio is crucial. SIPs are cost-efficient and easy to invest in given the low financial commitment level, while lumpsum investments yield higher returns in favourable market conditions. You need to understand your financial obligations, expectations, risk appetite, and investment tenure to choose what works for you. You must inculcate financial discipline and do your homework on market movements.
Based on your understanding and skill, you can decide how you want to invest in mutual funds. If you are new to investing, SIPs are a better option. However, you should seek a professional financial advisor’s advice to aid your decisions regarding your investments. If you are a seasoned investor, you can divide your assets between SIPs and lumpsum investments. This will allow you to reap the advantages of SIPs and amplify your gains by investing significant amounts during market lows.
As with my cricket, I hope that your decision to invest in mutual funds in one go as a lump sum amount or in bite-sized periodic investments through SIPs will depend on your financial needs over time. It would be advisable to take your time and understand your expectations, risk appetite, and time horizon before making your choice to savour the wins of your financial journey.
Disclaimer: Mr. Deepak P Jain is the Head – Sales, Edelweiss Asset Management Limited (EAML) and the views expressed above are his own.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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