From your wealth advisor to your banker, including brochures from the OPC house, gyan is similar – your money is best divided into small systematic investment plans (SIPs).

SIPs are fixed monthly payments transferred from your bank account to purchase units in specific MF plans. Each month, for the same investment, you get more or less units depending on their price at that time.

Where SIPs Mark

The advantages are many. SIPs introduce discipline into your financial habits, ensuring that a portion of your money is set aside each month for investment – similar to a recurring bank deposit, but which likely generates better returns. If you plan to stay invested in the MF system for a while, SIPs reduce the average cost of units purchased. This is because they allow you to buy shares over various market cycles, so the cost per share is averaged over the entire investment period.

In addition, SIPS allows you to compose your investment in certain funds – the returns can be reinvested in the funds so that you get higher returns.

The biggest advantage of SIPs, as it is often said, is that they are relatively stress free. You can make an informed decision about investing in a fund, take care of the documentation, including standing instructions with your bank, and more or less forget about it. The SIP will do its best to protect you from the vagaries of the market and give you as high a return as possible.

“Investment in the couch potato”

The last, perhaps, is exactly what could also be used as an argument against SIPs – they could turn you into a “sweet potato investor”. Overwhelmed by stress at work, household commitments, and other demands, you can stop thinking about your finances once you know that a significant amount of money is going into your investment fund each month.

“I’m not a huge fan of SIP,” said an investment professional who wished to remain anonymous. Federal. “I only recommend it to clients who lack financial discipline – those who I think would waste money unless it was funneled into SIPs every month.”

Flat-rate investments in FMs certainly involve an element of risk. If you make the wrong choice, you lose a lot of money. However, it may inspire you to devote more time and energy to research. Simple steps such as reading trade sections on a regular basis in newspapers, talking to friends or relatives who invest in equity funds regularly, or consulting with a savvy wealth manager can greatly hone your investing skills as you go along. time.

And your “lump sum” doesn’t have to be 1 lakh. It could be as small as 5,000. The discipline of spending a few hours a month thinking about how best to invest that amount could be a great exercise in financial discipline.

Investment horizon

“In a long-term investment – say 10 years – there is little difference between the SIP and the lump sum in terms of return,” said Srikala Bhashyam, managing partner of investment firm RS Consultants. the Federal. “Which mode you choose depends entirely on your risk appetite and your investment horizon. »The longer the latter, the more you can opt for a lump sum.

But, unless you are absolutely confident in your ability to take risks, it would be wise not to put too many eggs in the lump sum basket – to begin with, and even later. Rather than looking at the equation as “SIP vs flat-rate”, consider it “SIP, flat-rate and others”, the latter being non-MF investments such as RD / FD banking, postal savings, etc.

Here, again, you can split your MF money between SIP and lump sum in tandem with your risk appetite – the lower it is, the more you have to stick to SIP. But that shouldn’t be your only criteria. The market cycle matters too. When it hits bottom, a lump sum investment will be at its highest, earning you huge returns when the market improves. On the contrary, when the market is doing well, a lump sum does not make much sense since you will end up paying more for fewer MF units.

Recalling the March 2020 stock market crash, Bhashyam said those who invested lump sums had achieved around 70% returns by then, although “this is probably a once in a lifetime opportunity.”

Yet, she added, history has shown that the market corrects itself once or twice a year, so the losses are mostly offset. These trends, of course, require a pair of seasoned eyes to spot and exploit them.

Systematic transfer plans

Systematic Transfer Plans (STP) strike a balance between SIPs and lump sum investments. It is basically a way for you to make a planned transfer of funds from one plan to another within the same fund.

For example, if you want to invest ₹ 1 lakh in a stock program but are nervous about doing it all at once, you can place it in a loan or cash program where the corpus will give you will earn slightly higher returns than your savings account. You can then ask MF Company to transfer 10,000 each month to the desired stock plan, until the full amount is transferred. Halfway between this arrangement, if you lose faith in the equity regime, you can end the transfers.

But it may not be a tax-efficient solution, Bhashyam warned, as the money placed in the liquid fund is taxed.

You can, however, try STPs before you grow further as an investor and gain enough confidence and skill to invest some of your money directly into lump sums.