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  • Category: Mutual Funds

    Which type of mutual fund is better - Lumpsum investment or SIP

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    I have heard that mutual fund is one of the best investment tool to grow the capital for a longer period of time. Mutual fund has various advantage as investment option while compared to other options like insurance, bank FD etc.

    But I want to know how to go with mutual fund, systematic way by investing an amount regularly in a month interval or lump sump investment at a time. What are the advantages of SIP over lump sump investment in case of mutual fund?
  • Answers

    3 Answers found.
  • We, the common investors, can't feel the pulse of the market accurately. We can't predict whether the market will go up or come down during the next three months, six months or one year. We don't know whether the market would remanin in the bear grip or whether the bull will run. We don't know how much market would lose or how much would it gain.

    But we know that equity, as a thumb rule, gives very good return in 5 years. We can't predict market fluctuations but at the same time we want to take advantage of every fall. So, for the retail investors in equity, SIP is the most advantageous to enjoy the benefit of every fall and also for the partial immunity from market fluctuations.

    However, the above general comment does not hold true for ELSS funds. The financial experts advise us to put money in ELSS funds at one go every year.

    Beware! I question everything and everybody.

  • Mutual funds have one risk compared to insurance bank FD etc. That is capital risk. There is always a risk of the original capital itself reducing or eroding. However the more risk, the more returns and vice versa. One should be thoroughly aware of this before investing Mutual funds or stock market.
    Once having decided to invest in Mutual funds, the question is how to invest- in lump sum or by systematic Investment or SIP.
    That depends on the availability of money with you and the future availability and need to invest regularly.

    If you had already invested in Bank FDs, company FDs and Insurance and you have still excess money which you do not need for some years at least, that extra you can invest in some established and reputed Mutual Funds in lump sum.

    SIP is suitable for those who want to regularly invest in MF, but do not have the lump sum. It is suited for those monthly salaried employees or those who get regular income and can spare some amount regularly.
    The benefit here is that of 'averaging'. In lump sum purchase one may have to buy at the cost existing on the day of purchase. That may be high or highest or low or lowest. As price may get fluctuated, in SIP the buy price in each month may be different. At the end on totality, the price may be somewhere between the high and low, that is average. It is a sort o shock absorption. However calculation of target price to sell or redeem may be a bit complex in SIP unlike in lump sum investment.
    If the investor is a monthly earner it is advisable to resort to SIP rather than break any existing lump sum savings.

  • Mutual fund be it lumpsum or SIP both have risk margin. And with lumpsum the risk margin is higher. Also the with the SIP the risk is reduced. So the main reason behind people opting for the SIP route is risk is reduced. Also the more shared pool are being used when they want to buy SIP in the low market conditions. This way they have better returns that manage in the fluctuations of the market. In case of lumpsum amount, the amount that is being added goes through same market condition like SIP. I think one should know the point behind SIP and how they are being used by those who can't take lumpsum risk. Because choice between the two often comes down to personal choice if the market conditions are not random as in during recession time.

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