What is a SIP?
It is a Systematic Investment Plan. SIP is a brilliant and bother-free device for investing a pre-determined amount into shared assets (mutual funds). It is similar to a Recurring Deposit (RD), where we can save a fixed sum consistently for a certain period. In SIP we put a fixed sum routinely in mutual funds scheme. These plans have the potential to beat inflation and make riches for us in the long run. It is ideal for small investors.
Advantages of investing through SIP:
- Power of compounding: It is the snowball effect that occurs when earnings generate even more earnings. SIP, which proceeds for an extensive stretch, helps us to harness the power of compounding. For instance, investing resources in thousands every month around young adulthood can let us make roughly in crores, at the age of retirement with the capability of compounding. It can hence construct riches in the long haul.
- When small amounts are contributed, they add up significantly to make a huge sum.
- Through SIP’s we can invest with a modest amount without having to contribute with a lot of cash.
- SIP gives us the flexibility to change the amount that we want to invest, the recurrence of contributing (frequency of investment), the plan we want to put invest in, and the time we need to proceed with the investment.
- Timing the market is not necessary: With SIP, we invest routinely in mutual fund schemes irrespective of the market highs and lows. In this way, the cost of the purchase is averaged out without the need for timing the market.
- SIP is convenient and there are alternatives of the sum being auto-debited at our choice of frequency, without the stress over contributing manually every month.
- We can start investing with as low as five hundred rupees a month.
What is a Lump sum Investment?
Investing a significant and fixed amount in a particular mutual fund scheme at a time. In Lump sum investing, it is important to be aware of market cycles and investing during the market lows (especially when the stock market hits bottom). It is a one-time investment of a fixed period. Several units are allocated according to the current NFO (New Fund Offer) or the market condition.
Advantages of Lump sum investment:
- It is ideal for long term horizons and for the financial goals of the future.
- There will be good benefits if markets will rise.
- It brings about good returns when used the strategy of “buy and hold”, by choosing a bunch of top-rated equity mutual funds and investing and holding for a long time. Average returns of a five-year Lump sum investment when seen in NIFTY (National Stock Exchange Fifty) over different five-year periods since the year 2003, has been 12.4 per cent per annum, which is a fairly good return.
- It is convenient for investors with a considerably large sum of money at a point in time.
- Lumpsum mode gives better and higher returns compared to SIP during rising markets.
What is volatility?: It can also be called as unpredictability and refers to swings or the frequency or severity with which. The market price of an investment fluctuates. The more market swing or the highs and lows, the more volatile a market is.
Due to the COVID-19 pandemic, the stock markets have crashed and are visible to be in a low. When looked at the similar economic crises of India in the past, with the similar correction noticed in this coronavirus situation as well, it is better to invest during the correction of the economy before the stock market recovers.
SIP or Lumpsum, which one is the best for a volatile market?
We need to invest either through SIP or Lumpsum to beat the inflation, which gradually occurs with the changing times and also to meet our future financial goals.
SIP in a volatile market:
If invested in SIP within the past few months, the return might be low due to the current volatile market. Hence, it is better to continue the investment for the longer-term. If invested in SIP now, because the returns are not much affected by the ups and downs of the market. It is not important to time the market while investing in SIP. Because the rupee cost averaging of the SIP can benefit us.
Lumpsum investment in a volatile market:
The volatile market provides a good opportunity to invest in a lump sum when the stock market is at the bottom or in its lows and remember to hold it for a longer time (longer time horizon), using the “buy and hold” strategy for good returns. While investing through the lumpsum method, it is important to target the recession-resistant, blue-chip stocks. According to an investment strategy by a renowned investor Warren Buffett, the traders have to be fearful when the others are greedy and greedy when the others are fearful. This is a key point while investing through the lumpsum method.
For an investor who is inexperienced and does not time the market well, it is better to invest through SIP. This is because it does not involve many risks and the cost averages irrespective of the market ups and downs.
For an experienced investor who can time the market and can target in the best finance shares like the blue-chip stocks, which can provide good returns despite the economic crises, the Lump sum investment is the best when it is a bear market which refers to the market low
Thus, investing Lumpsum is the best for investors in a volatile market if invested in the right finance shares.
Whatever route you choose, the SIP or the Lumpsum route, it is important to remember that investing requires patience. So, make sure to asses your scheme with care to understand it well.