While determining whether you should invest through lump sum amounts or through a systematic investment plan (SIP) approach, you should look at a number of factors like your cash flow needs, appetite for risk, financial goals and knowledge of markets before settling on a method.
Even if you invest the same amount of money under either of these methods, results may differ due to the amount of money exposed to the market at different points in time. However, your long term goals could be achievable faster if you allocate a set amount regularly over a longer period of time so it can compound. A SIP may hence, generate good returns over time due to this compounding effect.
A SIP helps you adhere to the “save first, spend later” mantra, since you invest the same amount at regular intervals, often through an automated transfer from your bank account. Making these incremental payments not only help you meet your long term objectives, but also simultaneously prevent you from the stress of making a lump sum payment from your disposable income or savings to cover the deficit.
Since you are investing in mutual funds at regular intervals, you are exposed to the market, irrespective of whether it’s up or down. By staggering your investments over a period of time, you seek to mitigate the risk of losses during an economic downturn. It also reduces the temptation of taking advantage of a market upswing, as you are purchasing new units, regardless of the Net Asset Value (NAV). However, remember that SIPs are not a guaranteed buffer against market volatility.
If you happen to be an avid investor and have adequate financial knowledge, lump sum investments can make sense for you. Timing the market is a tough challenge, unless you are comfortable with the risks involved and can dedicate time to watching market movements. Ultimately, there is no set right or wrong way to invest in capital markets. However, not investing at all could end up being a bad decision, as you could be missing out on the opportunity to grow your wealth for the future.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.