Mutual funds have become an incredibly popular option for a wide variety of investors.
Many individuals want to invest in mutual funds these days, as there are a host of mutual fund categories to choose from, and different funds that suits investors’ risk appetite.
But the question most mutual fund investors ask is when is the best time to invest lumpsum in a mutual fund and when to invest through an SIP.
Before knowing when to invest lump sum in mutual fund and when to choose SIP, let’s first understand the concepts as well.
A lump sum is a single large investment done by an investor in one go in any mutual fund scheme.
A lump sum investment is generally considered when the investor has a big corpus to invest.
This could be money received after retirement, from the sale of a house, from an inheritance or it might just be the case that you have accumulated money in your bank account and wish to invest it now.
Hence, the first prerequisite to know if it is good to invest lump sum in mutual funds is to have a sizeable corpus at hand.
An SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular interval.
It is similar to regular saving schemes like a recurring deposit.
In an SIP, the investment is done regularly on specific intervals, either weekly, monthly or quarterly. When to invest in SIP is usually an easier decision to take because you can start with as low as Rs 500 per month as well.
Mutual fund investors with a high risk appetite invest in equity oriented mutual funds to get higher returns.
Both methods have their own benefits. SIPs help with inculcating regular investment habits due to lower capital requirement. It also helps to average the cost of the rupee fluctuations over time. Both SIP and lump sum methods help us with power of compunding.
The most common question investors ask is – Is this the right time to start a SIP? I believe – Any time is a good time to start investing. Fundamentally, starting an SIP or lump sum should be independent of existing market levels.
Which method you choose depends on what suits you more: regular monthly investments or a larger corpus that can be invested at once.
Meaning, whether Sensex is 25,000 or 39,000 or even 61,000, it should not matter.
Many investors have the misconception that SIP should not be started when markets are trading at higher levels. It is almost impossible to predict short-term market movement.
Time spent in the market is more important, than timing the markets. Corrections are inevitable in the stock market and they are bound to come. They spread panic in the short-term but mostly don’t last long in an ongoing bull market.
Hence, if you are planning for long-term capital appreciation, then begin investing in a SIP as soon as you can.