Many people in India are thinking that SIP is a type of mutual fund. If you say them NO, it’s not, then the next question will be “what is SIP”.
Below in our article we have discussed what is SIP and how it’s different from the lump sum investment plan.
In a Systematic Investment Plan or SIP, you invest a predefined amount regularly to a mutual fund scheme. Under SIP, mutual fund units are allotted to you based on the applicable Net Asset Value of mutual fund on each period’s transaction date. Net Asset Value or NAV can be tracked for the respective mutual fund online.
Based on the market value on the date of your investment, you will be allotted certain number of mutual fund units. With your every periodic investment in SIP, you will be allotted additional units of the mutual fund to your account.
Difference between Lump sum Investment and Systematic Investment Plan or SIP
Lump Sum Investment
Lump sum investment is the easiest method of investing in mutual fund schemes. After choosing your mutual fund scheme, you are required to approach the fund owner with your cheque amount to invest.
The date of transaction in a lump sum investment plan will be taken as the date of investment while calculating the net asset value of mutual fund. If future Net asset value increases based on the transaction date value then you will have profit from your investments. If it goes down then you would lose money on the entire investment.
If you are investing a lump sum amount then from the invested money, mutual fund companies will be deducting a fee called entry load and the balance amount will be invested in buying mutual funds. If the entry load is 2% then for an investment of 100000 rupees you will get mutual fund units for 98000 rupees (2000 will be charged as entry load).
Systematic Investment Plan or SIP
Instead of investing a lump sum amount, in Systematic investment plan or SIP, you invest a predefined amount periodically over a period of time in any mutual fund scheme of your choice. Mutual fund schemes are having flexibility of investing weekly, monthly or quarterly.
The main difference between SIP and Lump Sum investment is with the date of transaction. If you invest a lump sum amount then your valuation will be based on that single date on which you have invested your entire amount, whereas, through systematic investment plan or SIP, you can get an average of the valuations by reducing risk.
If you have decided to invest 1000 rupees in a mutual fund through a systematic investment plan or SIP then your units will be decided on the date of your investment to mutual fund. If your investment date is 5th of the month then value of mutual fund on that date will be considered and you will be delivered with the number of mutual funds accordingly.
If on the date of your first investment, market value of mutual fund was 20 rupees then you get 50 units. Similarly on the next month if it’s 25 rupees then you get 40 units. Your units of mutual fund will change based on the value on the date of your transaction. But on an average, you have to see for a year how much you have paid for a unit of mutual fund.
If you choose the valuation date by closely monitoring the market move and mutual fund’s NAV performance then in a falling market, lump sum investment to a mutual fund will be beneficial.
Both methods have merits and demerits, so you are required to choose the one that suits your investment style.
If you can monitor the market move and have the expertise of buying mutual funds in a volatile market then we suggest you to consider buying mutual funds in lots while values are falling down. If you do not have any lump sum amount to invest then better stick to systematic investment plan or SIP.