• HDFC
• 26 Apr 2018
• MF Product

HDFC, Tester

Almost all experts agree that a systematic investment plan or SIP is one of the best ways to invest in equity mutual funds. Over a longer term, SIPs offer a better way to ride out volatility than lump sum investments because they benefit from a principle called rupee cost averaging.

When you invest via SIPs, you buy more units at a lower price and fewer units at a higher price, ensuring that your average cost per unit is low.

When you invest in a mutual fund in a lump sum, you are investing all your money at the same price increasing your risk as well as your potential for return.

So, when should you invest in an equity mutual fund via SIP and when should you choose the lump sum route?

Cash flow: Your cash flow will be the most important factor in your choice of investment vehicle. If you have a regular investible surplus, use the SIP route. But if you have got a one-time windfall – for example, a Diwali bonus or proceeds from a sale – invest as a lump sum. Even when you are investing in a lump sum, you can minimize your risk by parking your funds in a safe debt fund and use the STP (systematic transfer plan from one mutual fund scheme to another) to move it to equity funds over time.

Long-term investments: For most investors, SIP is the best route to invest for the long-term as it forces you to be regular and disciplined in your approach. It also obviates the need to time the market as you are not investing all your money in one go. If you make a lump sum investment and the market falls, your loss will be much higher.

Unpredictable markets: When you are not sure which way the market will move, SIP is your best option. Most investors do not have the expertise or the wherewithal to track and predict the movements of the market. By entering the market in small amounts, you get the opportunity to participate in any upside,and you lower your risk if the markets fall.

Rising markets: Lump sum investments perform better than SIPs because, in a rising market, your average cost of purchase is lower in a lump sum than an SIP. A lump sum investment may also make sense when markets have fallen sharply due to technical factors, and you expect share prices to rise. You could make a one-time tactical investment in addition to your regular SIPs.

SIPs offer a great balance between risk and return and are perfect for most investors, while a lump sum investment holds out the potential for greater return at much higher risk.