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SIP Or Lumpsum: Which Is The Better Investment Strategy?

There are two ways to invest your money.

One, obviously, is the lump sum investment, wherein you invest your entire surplus amount at a go. For example, making a fixed deposit or buying a single premium insurance policy. (You simply cannot miss knowing the 7 Reasons Why Single Premium Insurance Is A Stupidity.)

Second option is to invest small amounts at regular intervals, over a long period of time. For example, a recurring deposit or a systematic investment plan (SIP) in a mutual fund scheme.

People are often in a dilemma as to which is the better way to invest their money.

Needless to mention, this does not apply to the monthly amounts that you are able to save for long term investment.

This confusion arises primarily when you receive a large sum of money at a stroke. This often happens when you are paid annual or diwali bonus by your employer. Or, your family gifts you a big sum on your birthday or wedding anniversary. Or, you have sold an old property.

Naturally, you don't want such huge balances to lie idle in your savings account.

Naturally, you want to invest it as early as possible.

This is where you need to be (extremely) CAREFUL.

Else, by making a wrong choice, you could end up with huge losses.

First and foremost: AVOID Fixed Deposits, Insurance Policies and Gold. As repeatedly warned, these are harmful for the long term healthy growth of your personal wealth.

I am sure you are aware of the Five Forbidden Rules of Fixed Deposits.

Next: If you are underweight on real estate, you can explore the option of buying a new property to add to your net worth.

Lastly (or rather firstly): The most preferred investment, of course, is the mutual funds.

Let's look at mutual funds from the perspective of SIP or Lump-sum; which is the dilemma we are trying to SOLVE through this blog post.

Don't KILL your money with a wrong choice of investment.

Broadly, there are two types of mutual funds...
... Equity Mutual Funds and
... Debt Mutual Funds

(Note: I am ignoring the Gold Mutual Funds. Because, the objective of investment in gold should primarily be diversification with a small corpus; and not as an investment to earn returns.)

Equity markets, as we all know, are highly volatile. The shares prices can vary considerably on day-to-day basis. In such a scenario, if you put lump sum money, you could either gain a lot or lose a lot. It would then become a sort of lottery.

And, you SHOULD NOT gamble with your money:

Instead, if you invested small amounts regularly, you will average out your total cost of acquisition. Thus, by doing Systematic Investment Planning (SIP) you will cut down the volatility risk and increase your chances of making money.

Hence, the portion of your lump sum amount  that is earmarked for investment in the equity funds  should first be deposited in a liquid fund. Thereafter, you can instruct the mutual fund AMC to transfer a small given sum every month to an equity fund. (This, by the way, is known as Systematic Transfer Plan or STP. It is nothing but SIP of a lump sum money.)

For more clarity read the SIP, STP and SWP : Mutual fund mumbo jumbo.

Important: This ALSO INCLUDES the Balanced Funds, which have high 75%+ exposure to equity. (And, presently, as the market valuations are expensive, investment in MIP schemes too — which have 10-25% exposure to equity — should be done via the SIP route.) 

Warning: Balanced Fund WRONGLY Sold As Guaranteed Income Scheme.

Debt markets, on the other hand, are relatively quite stable. If you put your money, today or tomorrow or next month, it is not going to make much difference. As such, even if you were to put lump sum money in a debt fund, you are not likely to lose.

Hence, the portion of your lump sum amount  that is earmarked for investment in the debt funds  can be invested on one-time basis, without any problem.

Therefore, the answer is plain and simple
- If it is an equity fund, do SIP. 
- If it is a debt fund, both SIP and lump sum are OK.

Keep this in mind, and you won't go wrong with your investments.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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