Moneycontrol
Mar 06, 2017 02:27 PM IST | Source: Moneycontrol.com

Lumpsum investing stands apart from a systematic investment plan

A SIP consists of a process whereby an investor invests a fixed sum of money each month usually into a mutual fund.

Arnav Pandya

There is a great amount of interest among investors to ensure that they are investing in mutual funds through a systematic investment plan (SIP). However many investors do not take the time or make an effort to understand what a SIP is actually. This often leads to a situation where they make the wrong interpretation and this could lead to them adopting a route that is completely opposite to what a SIP actually requires. This requires some basic understanding and here is a look at the entire term and how one should know its various details.

Nature

A SIP consists of a process whereby an investor invests a fixed sum of money each month usually into an equity oriented mutual fund though this could be in a debt fund also. The key part of the process is that a fixed sum like say Rs 5,000 or Rs 10,000 is invested each month on a fixed date so it could be the 1st of the month or it could be 20th of the month. The idea is that every month a fixed sum has to be invested.

The SIP is the process of investing and is not an investment by itself. This distinction is very important for any investor because many people say that they want to undertake a SIP investment. The belief is that the SIP is an investment and that this will lead to returns being earned by the investor. This is not the case because the SIP by itself does not guarantee any returns for the investor. It is important to see the fund in which the investment is being made because this is where the returns are going to come from. Only when the fund where the money is invested rises in value will the investor be able to earn some returns. So the selection of the fund for the investment is important and this needs to be given the required attention also.

Not lumpsum

Another confusion that a lot of people have is that they say that they want to use a SIP for investment and then in the very next sentence say that they have a lumpsum to invest. These two ways of investing are the exact opposite of each other so if one of the routes is adopted then the other cannot be. For example the SIP involves investing a small sum each month out of the total amount to be invested so in effect it means that the total investment is being broken down into small parts and then the amount is being invested.

A lumpsum on the other hand is a big investment that is made at a single point of time. There are risks to making such an investment especially when one looks at equity funds because this will mean that the investment is going in at a single point of time. The position in the equity markets at this point will determine the kind of returns that are earned and there are risks to this as a fall in the markets after the investment will not give any opportunity to the investor to average out their cost. On the other hand the SIP gives the investor this opportunity as well as flexibility and hence this is something that needs to be considered. One can choose either of the options depending on their position and the goals that they want to achieve. However this needs some careful thought but most important is that they need to be clear about the meaning as otherwise they might be chasing things that are not possible.
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