Short-sighted and ill-advised investment decisions often singe prospective investors before they can actually ready themselves to take the plunge into investing their hard-earned money. Mutual funds, though, quite an old instrument in the markets, still attract an air of skepticism when it comes to mindful and rational decision making on the part of investors. Fortunately, SIPs (Systematic Investment Plans) have become synonymous with mutual funds over time. In fact, the recall value of the term ‘SIP’ is often greater than that of the term ‘Mutual Funds’ itself.
A majority of retail investors now consider mutual funds to be an investment that occurs through monthly installments. While lump-sum mutual fund investments can be made in one go like the traditional term deposits in banks, investors prefer to factor in multiple aspects before they plunge into mutual funds – such as their investment profile, income and expenditures, and financial goals. A SIP calculator is a good way to know the future worth of your investments in advance.
Investment decisions should not be solely based on the sole criterion of past returns but instead, they should be a well-allocated mix of various factors that can be achieved through a thorough analysis of risk and return on the part of investors.
A suitable asset allocation is typically based on one’s investment horizon and risk appetite. – Morning star
When investing in mutual funds, to maximize your returns:
- You should be ready for longer periods of investments and be ready to withstand the volatility of the market for a couple of years.
- You should assess the performance of the funds for at least a period of four or five years while selecting the funds for investment.
- The funds’ AUM can be another option to consider its worth. A typical fund’s AUM must always be above 500 crores to make it worthy of decent financial standing.
- The role of financial advisors and fund manager’s prominence can never be ignored while taking into consideration the choices.
Let us first dive into a side by side comparative analysis of a SIP and a lump-sum mutual fund scheme.
SIPs vs Lumpsum Investments
#1 A lump-sum investment has a larger sum locked in for a longer period of time. It can, therefore, be argued that the potential gains may be higher, owing to the power of compounding.
On the other hand, under a SIP, a regular instalment goes into the mutual fund scheme notwithstanding the bullish or bearish trend in the market. But this does not necessarily make SIPs score lower in terms of returns. This is because the returns will be generated based on a weighted average cost over a period of time. Using SIPs, investors may be able to take advantage of bearish sentiment and invest at lower levels for higher gains. This concept is also referred to as Rupee Cost Averaging.
#2 SIP in a growth fund is greatly suitable for salaried employees and new investors who may find it challenging to channel large sums via lumpsum investments. SIPs ensure that an investor carries on with his judicious and healthy saving and investing practices earning returns on the go and when taken up for longer period, ensuring growth.
Lumpsum investments are possible for a typical retail investor when they get a windfall amount, for example, the sale proceeds of a property, one-time settlement amount or amount received at the time of maturity of an old investment.
#3 SIPs can be taken up keeping the purpose in mind. There are specific SIPs focused on children’s education, marriage, retirement and other future contingencies. They are easy to understand and turn your regular income into a productive asset over a period of time. Different SIPs can be set up in different mutual fund types keeping in mind the end goal of that particular investment. For instance, a SIP set up for retirement will have a different asset class and risk level compared to one set up for the purpose of buying a car in two years’ time.
#4 SIP lends an automatic mode to your wealth creation, while in a lump-sum you have to make efforts not to spend your savings on some unthrifty desire to keep them for investing in the near future. Each month a small portion from your income scurries its way automatically to your SIP adding to your wealth and lending your investment the virtues of discipline and regular investing. You don’t need to worry about filing cheques, the bank account can be directly attached and each month the instalment is debited accordingly.
The fact that SIPs are automatic means that there is friction in terms of regularly investing every month. An investor can treat a SIP investment like a monthly utility bill or an EMI for simplicity’s sake.
#5 Investments concerning liquid funds have lump sum investments in common rather than investments through SIP. SIP has given significant results over the year performing better than lumpsum mutual fund investments. In order to be sure about your investment, most portals have a SIP calculator that indicates to you the maturity value of your investment, taking into consideration the specific fund you chose, the tenure of investment, the frequency and quantum of your installments.
#6 SIPs assist in spreading your risks, thus taking care of the future returns. Investors realize that there is more to investments than just expected returns. Risk is a prime factor that can be controlled to realize higher returns. SIPs use the power of rupee cost averaging to spread the risk of equities.
#7 The financial services business is becoming more and more client-oriented. Several initiatives are being taken to inform the investors on the one hand and build long term relationships with them on the other. Selling is secondary and advice is primary today. SIPs therefore assist in creating trustful relationships between the advisors and investors over a long period of time. This benefits both the investor and the advisor.
With SIPs, investors stand to gain from more than just lowering their average cost. They reclaim the old practice of saving periodically and investing over the long term. The difference lies in the fact that instead of investing in conventional modes like gold, RDs, FDs and other schemes, you will be investing in SIPs. Not only does SIP assure higher returns than the conventional modes, but also slowly builds up your wealth.