Is SIP better or lump sum?

 

How is SIP better than Lum Sump?

[A] Introduction: SIP stands for Systematic Investment Plan. If you decipher the full form, you will realize that SIP is basically a way of investing, rather, a systematic way. The whole idea of SIP is not new. The same thing is called “Recurring Deposit” (RD) if you prefer to invest in term or fixed deposits in a staggered manner.

But yes, there is a difference between SIP and RD. Please note that here we have assumed that one is interested in doing a mutual fund SIP in an equity fund.

An SIP is a way to invest money in the equity at regular intervals - generally that interval is monthly. That way, you keep investing a fixed sum of money at a regular interval that allows you to stagger your invested across the time lines (months, years) and also at the different levels of market. So, you keep investing when market is high, low or flat. That allows you to average your NPV.

One advantage of this method is that you do not have to time the market. You can keep investing without worrying about the future trend of the market. Plus, it brings a very basic discipline to the investing process that allows you to invest a large amount of money in a long run.

Now, let us talk about the lump sum. Lump sum investment is simple - investing all the corpus you have in one go. Lump sum investment will be done at one single market point (Sensex level). So, if you get your timing right, if you can invest when the Sensex is low, you will make a killing when the Sensex rebounds. But if you invest the lump sum when markets are all time high, it may take a very long time to make money. So, when it comes to lump sum investing, it is all about timing. AND TIMING THE MARKET IS ONLY POSSIBLE WITH LUCK. No charts, fundamentals or any analysis can exactly tell you the level of market bottom. In other words, timing the investment in share market is akin to taking blind risk and should be avoided.

With SIP, that risk is nullified.

Please note that when markets are going up, SIP does not help much. But, then, in long runs, markets are also volatile. And an SIP is the best way to invest in a volatile market as it captures all the lows and high of an economic cycle.

Overall, an SIP is the better option for investment in any financial asset class, which is volatile in nature, in particular, equities.

Feel free to share feedback or ask question to me by writing to pvariya@gmail.com

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