Understand the two methods of investing in a mutual fund and which one scores over the other
07-Jun-2022 •Ravi Banagere
A common dilemma among many mutual fund investors is choosing the method of putting their money. Just like bank deposits come with two options - fixed deposit and recurring deposit, mutual funds also give you the option to invest the amount in one shot or put a fixed amount at a regular interval, say monthly. The first option is called 'lumpsum' investment and the other one is called 'systematic investment plan', popularly known as SIP.
While investing in a mutual fund, doing SIPs is a much superior alternative to lumpsum as the former solves the three big problems that people face while starting their investing journey - lack of adequate investible surplus, lack of discipline and the fear of volatility in the stock market.
Lack of adequate investible surplus: If you lack adequate investible surplus as of now, do not worry. With mutual funds SIP, you can start investing with as low as Rs 500 per month. And slowly but steadily, your money will start growing, leading to a bigger corpus over time. In fact, a lot of times, a small start can be a better start because even if you make mistakes initially, a large amount of money would not be at stake. On the contrary, if you keep waiting to accumulate a sizable amount before making your first mutual fund investment, you may be too late.
Lack of discipline: Many people often struggle to stick to their investment plan. Sometimes, it's the temptation to splurge money over materialistic things, or sometimes the current state of the stock market scares them away. An SIP puts an end to all of this by automating the process of investing. It also fits quite well for salaried people as they earn monthly so they can also invest on a monthly basis.
Dealing with the stock market volatility: If someone would have invested Rs 20 lakh in Sensex at the beginning of 2009, his money would have grown to Rs 36 lakh in a year. On the other hand, someone investing the same Rs 20 lakh at the beginning of 2008 (the year of the great financial crisis), would have seen the investment value getting reduced to just Rs 15.4 lakh in the next 3 months, Rs 13.3 lakh in another 3 months, Rs 12.8 lakhs in further 3 months and finally to Rs 9.6 lakh by the end of the year. And when you see such a substantial fall in your investment value in a short period, most people lose their patience and book a loss which is undesirable. So, the point is you don't know how the market would behave soon after you invest.
SIPs help you stay invested through the ups and downs of the market as you get rid of the dilemma of figuring out when to invest. Here, you simply put a fixed amount on a monthly basis irrespective of what is happening in the stock market. Now of course, in a bull phase, doing an SIP might seem like a losing proposition as you can see in the graph above for the period 2020-21. But nobody knew that the market would get over the fear of COVID-19 so soon. Moreover, the kind of portfolio decline that the investors with the lumpsum route witnessed in March 2020, would have given many of them some sleepless nights for sure. Since we can't predict the stock market, doing an SIP is the only viable option to contain the volatility that comes with equity investing. SIPs protect you from sharp losses that come without knocking your door. This is very crucial in your investing journey to help you stay the course. Under most circumstances and over a sufficiently long period, SIPs will do well enough.
Therefore, if you lack a large lumpsum amount to invest, do not wait to accumulate one. Start with an SIP of however small an amount you can. Believe us, it has the potential to give you big results over the long-term. In fact, even if you have a big amount to invest, spread that money over a six to 12 months SIP to average your cost and reduce the risk of investing when the market is high. It also helps avoid panic during tough times which leads to a healthy return in the long run.