Friday, September 22, 2023

How is SIP Different than a One-Time Investment?


If we have to discuss the modalities of online SIP Investment and One Time investment, you necessarily need to first gain an insight into the business of Mutual Funds and how they operate. It is beyond doubt that Mutual funds have gained a position of primacy amongst the investors for more reasons that one. The array of options under this and the number of Mutual Funds Managers in the market have made this investment option an attractive proposition. It bears inherent advantages comprising of little effort on the investor and provides returns higher than most investment options in the country.

What is Mutual Fund?

It is a pool of money contributed by multiple investors with a common aim to save and invest the corpus in various asset classes like debt and liquid and share the rewards amongst themselves proportionately. As a corollary, they also similarly share the losses. The investors get the benefit of professional handling of their corpus through Asset Management Companies and Mutual Fund Managers, who act on their behalf.

Types of Mutual Funds in India:

  • Based on Asset Class:

  • Equity Funds

  • Debt Funds

  • Money Market Funds

  • Balanced Funds

  • Index Funds

  • Sector Funds

  • Tax-saving Funds

  • Funds of Funds

  • Based on Structure:

  • Open-Ended Funds

  • Close-Ended Funds

  • Based on Investment Objective:

  • Growth Funds

  • Income Funds

  • Liquid Funds

Benefits offered by Mutual Funds:

As an investor in Mutual Funds, you aim to maximise returns on investment. Mutual funds do offer certain benefits that meet your expectations. A few important ones are:

  • Professional Management: You get the services of professionals to manage your funds to ensure that the funds are invested profitably.

  • Diversification: Investment spread across several vehicles ensures distribution of risks and provide substantial gains.

  • The range of Choice: Mutual Funds offer a plethora of options and a wide array of schemes to meet your expectations.

  • Affordability: Even a small investor can take the benefit of allocating funds in Mutual Funds.

  • Tax Deductions: Investment for periods of 1 year and above affords capital gains exemption.

  • Liquidity: Open-ended funds can be fully or partially redeemed as and when required by you.

  • Averaging Rupee Cost: Depending on the price of units, you either get a higher or lower number of units for the same amount of investment.

Investment mode in Mutual Funds:

There are two ways in which you can invest in Mutual Funds; one is through Systematic Investment Plan (SIP Investment) or One-Time Investment. The former is an investment in small pre-fixed amount for an extended period whereas the latter envisages parking of a lump-sum amount for a specific period. Which one scores over the other is a matter of choice rather than a logical argument as a comparison is an exercise in futility considering the vastly dissimilar nature of the application. The only thing common to both is in the objective of getting good returns. However, to choose one or the other, it is imperative to learn a bit more about them and arrive at an informed conclusion.

SIP (Systematic Investment Plan) in Mutual Funds:

It is a boon to small investors and individuals where you have to invest a fixed sum at a regular interval, generally every month maintaining a disciplined approach. The important features of this mode of investment are:

  • Regular investment encourages an investment discipline in the investor.

  • It is especially attractive to the small investor as you can start with a small amount of Rs.500 only.

  • It helps in building a corpus gradually over a long period.

  • SIP Investment has the advantage of Rupee Cost Averaging.

  • SIP Investment is convenient to the investor as the predetermined fixed amount is automatically deducted from your account as per agreed terms and date, post its activation.

Lump Sum Investment in Mutual Fund:

As the name suggests, the investor endowed with a large corpus can park it in Mutual Fund for a specific period. The main features of this mode are:

  • The benefits and rewards are forthcoming only in the long term.

  • Investors who are at home with high risk with the expectation of high returns are inclined to choose this option.

  • Long term financial goals may be met with this option.

  • The investor gets the benefit of parking the entire fund in one transaction.

Comparison between online SIP Investment and One Time Investment:

There is the host of differences between the two modes of investment, and each has its pros and cons. It is a question of perception at one point which may be changing with time in favour of one or the other.

  • Market Watch: With online SIP Investment an investor need not keep a watch on the market trends constantly to invest at the right time as compared to investing a; a large sum in one transaction. The former gets the advantage of spread out investment over some time. Thus it is immune from market volatility for the larger period in the event of a temporary downward spiral.

  • Rupee Cost Averaging: SIP Investment enjoys the benefit of investing in different stages of the market cycle allowing to purchase when the market is low and sell when it high thus maximising the rewards. This is possible only because SIP investment is spread out over a long period in a bouquet of diverse vehicles benefitting from Rupee Cost Averaging which a lump sum investment is deprived of.

  • Better for new investor: SIP Investment scores over Lump Sum investment as you are introduced to equities and volatility of market with nominal amounts and the risk is also smaller. It gradually builds an appetite for investment in a disciplined manner. Over some time you are equipped to venture into riskier options once they match your needs.

  • Superior past performance: SIP Investment enjoys a better track record in consistently giving good returns in the long run as compared to One Time Investment, which may click in your favour or may not.

Bottom Line:

There is no measure to determine one over the other conclusively. However, considering the several advantages, SIP Investment enjoys a slight edge over One Time Investment. However, in the fitness of things, it may not be a bad idea to invest in Mutual Fund in a combination of both the modes to evenly balance the merits against the demerits.

Andy Debolt
Andy is a graduate of the University of Minnesota with a Bachelors Degree in Journalism. When he isn't writing Andy enjoys water sports and spending time on the golf course.


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