Last Updated on March 19, 2020 by Gopal Gidwani
Mutual funds can be an effective instrument to build wealth. If you are a novice and wondering what is a mutual fund, it is a fund which is formed when multiple investors pool their capital and invest in company shares, bonds and stocks.
In this article, we look at methods of investing in mutual funds and their respective benefits. This can help you decide the better option, especially if you are looking to invest Rs. 1 lakh.
How to invest in mutual funds?
There are two ways in which you can invest in mutual funds. You can either start an SIP or invest in lumpsum
SIP
In the case of a SIP, you can invest in a mutual fund scheme at regular intervals. A fixed amount gets debited from your savings bank account at fixed intervals which can be monthly, quarterly or semi-annually. For example, if you invest Rs. 5,000 per month, it becomes a SIP investment. You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus
Lumpsum
In the case of lumpsum investments, you can invest a substantial amount all at once to buy the mutual fund units of your preferred mutual fund scheme. It is a one-time investment. For example, investing Rs. 1,00,000 in an equity mutual fund scheme is a lumpsum investment.
Benefits of lumpsum investments
a) Better returns in a bull market
When you make a lumpsum investment, the entire amount gets the benefit of the upward price movement for the whole of the duration of the bull run. On the other hand, if you invest through SIPs, you invest periodically. Hence, given the duration of SIPs, you may receive a smaller share of profits in comparison.
b) Power of compounding
When you invest a hefty lumpsum amount and remain invested for a longer tenure, you can appreciate the power of compounding. Your capital can earn income through interest or capital appreciation which can be reinvested to earn additional returns. Thus, you can create significant wealth in the long term.
c) Market corrections
If you are an experienced or well-informed investor, you may be able to benefit from market corrections. You can invest in a lumpsum to purchase more units of your mutual fund scheme when the market dips. Since you entered the market at a low level, you may be able to gain higher returns on your capital.
Benefits of opting for SIP
a) Rupee cost averaging
As money is invested in periodic intervals, you can benefit from market fluctuations. When the net asset value (NAV) is at low levels, you can acquire more units of the chosen fund. Conversely, when prices are high, you can purchase lesser units at the prevailing NAV. You can ultimately average out per unit cost of your mutual fund units and reduce the overall cost of your investment.
b) Financial discipline
When you choose to start a SIP, your investments become a significant part of your tax planning. It helps to inculcate a habit of investing sums at regular intervals. It puts you in the mode of disciplined investing where you can cut down unnecessary expenses and have a long-term approach towards getting higher returns.
c) Spreading out the risk
If you are not aware of the market conditions or not experienced enough, investing a substantial lumpsum amount can prove to be challenging. A planned SIP approach can lower your risk of entering the market even at an unfavourable moment and help spread the risk throughout the financial year.
Conclusion
While SIPs can allow you to invest at regular intervals, lumpsum investments can be ideal if you are looking at long-term tenures. If you compare SIP v/s lumpsum, each has its benefits, and you can choose any option to invest in mutual funds.