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Why investing through SIP is better than a lump sum investment?

If you want to save on your taxes, then ELSS is the best option. Equity Linked Savings Scheme (ELSS) is the only type of mutual fund that can cut down your taxes. There are two ways in which you could invest in this kind of mutual funds: SIP and one-time lumpsum investment. Now, SIPs are generally deemed to be better, as most of the time, under whatever situations, and over the long-term, SIPs tend to outperform lumpsum investments.

This article explains in detail how and why SIPs are better than lumpsum investments.

Overview

Systematic Investment Plans (SIPs) are not some sort of magic investment schemes. SIPs take away two major problems that keep investors from earning the best possible revenues from mutual funds, which are: (Best Information Today )

  • People, generally, try to buy units when the market is down and sell when it is high. SIP investment means investing a fixed sum periodically regardless of the market condition. As a result, investors automatically end up buying more units when the market is down.
  • People, usually, invest at irregular intervals and stop investing when the market crashes. Investing in SIP puts a full stop to this practice by bringing in the concept of regular/ periodic investments. So, SIPs help investors stay invested regardless of market conditions and lead to better revenues.

What is SIP investment?

SIP investment involves the same substantial amount but you have to invest via periodic installments. So, the big amount gets divided and you can invest a fixed amount periodically. Investors who do not have a lump sum at present could start SIP. Since these allow periodic investments, so they have gained popularity among the people.

The specific monthly amount shall be directly deducted from your bank account and disregards the timing of the market. Advantages of SIP are as follows:

  • Financial discipline will be developed in you when you invest in best SIP plans.
  • SIP investment is less risky.
  • It is flexible.
  • Investing in SIP is devoid of hassles.

 What is a Lump Sum Investment?

This is a one-time investment that you indulge into. If you happen to have a significant amount at hand and can bear higher risks, then you could choose to make lump sum investments.

This kind of investment will help you purchase the number of units you want to at a single go. It is usually chosen when the investor wants to generate extra wealth and liquidity. The lump-sum investment method uses the timing of the market strategy. The benefits of a lump sum investment are as follows:

  • You can invest a big amount
  • It is ideal for long term
  • You don’t have to pay periodically. It is just a single one-time payment.

Advantages of SIP over Lump Sum Investments

  1. Constant monitoring of the market not required

Inexperienced investors are usually not sure of the right time to enter the market. If you invest a substantial sum, then there is always a possibility that a large portion will be lost when the market collapses. You will benefit greatly from a high market, though.

In the case of SIP, the amount you invest is spent over time and the market volatility is met by only a little portion of your money.

  • Rupee Cost Averaging

SIP helps you to invest at different market cycle levels. The fund manager purchases more units when the market is low and can sell high when the market is at its highest. This will help to lower the cost of purchasing the units. The process is known as rupee cost averaging.

  • You develop a habit of investing

When you start SIP, you are required to set aside a fixed amount of money periodically. This will develop a healthy habit in you and some financial discipline as well.

  • Perfect for all the budding investors

If you have just started earning and are looking forward to saving some money, then starting best SIP plans is the best option for you. SIP will help you gain some experience in equities and you need to invest just a nominal amount. As you progress further, you can choose riskier but potent schemes if those suit your requirements.

  • Power of Compounding

Investing in SIP will help you increase your investment amount regularly by a fixed sum. You will be able to enjoy the benefit of compounding as you receive revenues on the revenues provided by your investment. This is called the power of compounding and is not available in lump sum investments.

  • Not Stressful

Starting SIP is much less stressful when compared to a lump sum investment. A less risky investment means that it will keep you hooked to investing. Markets are risky and highly volatile at times too. This can make you want to withdraw your amount in a hurry if you have invested via a lump sum.  

  • Good performance record

SIP investments are consistent in generating higher returns than a lump sum, in case of long-term (more than 5 years) investments.

Top 10 SIPs Plans of 2020

  1. ICICI Prudential Bluechip Fund
  2. DSP Tax Saver
  3. Franklin India Equity Fund
  4. ICICI Prudential Value Discovery Fund
  5. Axis Long Term Equity Fund
  6. Nippon India Tax Saver (ELSS) Fund
  7. DSP Equity Opportunities Fund
  8. Motilal Oswal Long Term Equity Fund
  9. Aditya Birla Sun Life Pure Value Fund
  10. HDFC Equity Fund

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