Benefits of SIP Investments over Lump sum Investments: The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor the investments.
1. Financial Discipline: Making lump sum investments call for a manual investing decision every time an investment is required to be made. However, when one is choosing to invest through SIP, the investing actions are automated, post the one-time registration of SIP. As such, regular investments through SIP inculcate a sense of financial discipline into your lives and help you maintain your investing journey at a decent pace.
2. Eliminating Emotional and Timing Bias: Investing in lump sum, especially in falling markets, requires you to tide over your own emotional bias to stop investing to prevent the reduction in invested value. Further, if you wait for the right time to invest in the markets, it will only result in delays in making investments. On the other hand, SIP investments continue to be made on a periodical basis, irrespective of whether the markets are falling or rising. As such, the emotional and timing bias automatically gets eliminated in this process.
3. Rupee Cost Averaging: SIP often entitles the investor to avail of the benefit of Rupee Cost Averaging, which means that the cost of investments gets averaged over time. This is because one continues to invest across market ups and downs. When the markets are falling, one gets a higher number of units. When the markets are rising, one gets a lower number of units but benefits from the increase in the overall portfolio valuation. For example, if one has invested the first instalment of Rs. 10,000 at Rs. 20 per unit, and then the next SIP investment is made at NAV of Rs. 16 per unit, one may average the cost of investments for these 2 SIP instalments at Rs. 18 per unit. This phenomenon of Rupee Cost Averaging continues until the investor continues to make regular investments.
4. Preferred for New Retail Investors: When one has just entered the world of investing, one is more inclined towards showing their investing acumen, than staying with the basic investing fundamentals. As such, ‘timing the market’ takes centre stage instead of spending ‘time in the market.’ When the markets are falling, one waits for the markets to fall further. When the markets are rising, one waits for the markets to get back at the reasonable valuations before investing any further to avoid loss in their investing decisions. SIP is therefore beneficial for such investors, wherein the investments continue to be made at regular intervals.
With the above considerations in mind, one may find investing in mutual funds through SIP investments as a preferred medium. However, the type of funds one chooses to invest in may also require a shift in the investing preferences, as investing a lump sum in short term debt funds like liquid and overnight funds may not call for significant timing risk. As such, the investor must take an informed decision after analysing their preferences and investing requirements.