The COVID-19 pandemic made people realise that the income from full-time employment might not be enough. While there was a time when that was the case, nowadays, that’s not the case. As people experienced salary cuts, they realised that they needed more money. But there were some who managed to pull through the salary cuts. They had signed up for a mutual fund scheme.
In mutual funds, an asset management company (AMC) pools money from a group of investors and puts it into a fund. Once enough money is collected into the fund, it is used to invest in financial securities. The returns generated through the mutual fund scheme are then proportionally divided among the different investors. For signing up for these schemes, you firstly need to contact an AMC. Once you have signed up for a mutual fund scheme, you will be required to choose the mode of investment. When it comes to the mode of investment, you will come across two options namely lump-sum investments and systematic investment plans (SIPs).
Lump-sum investments:
In lump-sum investments, you are required to make a one-time payment for your mutual fund investment. If you are considering signing up for the lump-sum investment option, you need to make sure that you have access to the required amount for investment. But that can’t always be the case. If that happens to be the case, you need to hassle to arrange for the funds. Regardless of its drawbacks, it is important to note that if you find this mode convenient, there is a benefit of a lump-sum payment for mutual fund investment. The benefit is that they require a one-time payment. If you are a self-employed investor who does not have a consistent source of income, you should consider signing up for the lump-sum mode of investment. Systematic investment plans need a predetermined amount to be deposited on a regular basis. In case you are an investor who relies on seasonal revenues, you may find it hard to keep up with the payments of a structured investment plan.
Systematic investment plans:
In a systematic investment plan (SIP), you have the option of allocating your funds to the mutual fund scheme on a regular basis. This makes SIPs different from lump-sum investments. That’s because, in lump-sum investments, you are required to invest the entire amount in one go. Investments in SIP can be either monthly or semi-annually. By continuously investing in this manner, you might meet your financial goals. After identifying the investment tenure and frequency, you can automate your investments. That can be done by leaving a standing instruction to your bank to transfer the amount directly from your bank account into the mutual fund SIP of your choice, on a fixed date. Some of the benefits of a systematic investment plan (SIP) are:
- Systematic investment plans come with the benefit of compounding:
One of the major reasons to sign up for these plans is that they allow you to take advantage of the benefit of compounding. The income created through the mutual fund scheme gets reinvested. With the passage of time, the act of investing and reinvesting repeatedly results in a snowball effect, that increases your income manifold. The feature of compounding is very beneficial for long-term wealth creation.
- SIPs are extremely flexible in nature:
In systematic investment plans, you have the flexibility to determine things like the amount required for investment, the interval of the SIP, and even the duration. Also, you have the option to change the amount, pause or stop the SIP.
Which mode of investment is better?
The answer is undoubtedly SIP. That’s because these plans are affordable and with their help, you can start your investment journey at a very low amount. Also, unlike lump-sum investments, these plans don’t burn a hole in your wallet.
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