Advantages and disadvantages of invest in go (lump sum) or over a number of years, by way of a systematic investment plan (SIP)
Once you decide to invest in a mutual fund scheme, decide how you want to invest in it. Do you want to invest everything at one shot (lump sum) or do you want to invest over a number of years, by way of a systematic investment plan (SIP)? Let us break down the pros and cons of both methods for a salaried person.
Salaried people usually get their salaries every month. It is a fixed cycle. A non-salaried person’s income is irregular. For instance, if you own a hotel, your income will not be the same every month. As SIPs mandate investments at fixed intervals, salaried persons can meet SIP commitments better than non-salaried persons.
Lump sum: not good
If you are starting your career, typically you would want to enjoy your financial independence and would spend a lot. But saving is also important. And that discipline is often hard to come by. In such cases, SIPs are a good way to start investing. They encourage you to save a decent sum of money every month, and see it grow.
Lump sum: not good
Most salaried individuals get bonuses, apart from their regular salaries. These bonus amounts can bring in a chunk of money. As SIPs are relatively smaller instalments, your bonus could be lying idle in your bank account for some time till it gets deployed fully. A lump sum gives the option to invest the entire amount in one shot.
SIP: not good
Lump sum: good
What’s your goal?
While long-term investing is always recommended, sometimes we have short-term or medium-term goals such as buying a car in 3 years. A lump sum investment ensures that your entire corpus gets to work right away. Your SIP will start to work progressively and may be too slow for your short- to medium-term goals.