Systematic investment plan (SIP) or lump sum investment is the million dollar question! Especially, in recent times when the stock markets move up by 2,000 points in one week and crash by another 1,000 points in the very next week. I get loads of mails asking if we should go for lump sum investments or should we start a SIP.
First let us understand the two concepts.
Lump sum investments
It is nothing but investing all your money at one go. Say you have Rs 5 lakh with you and you decide to invest the entire amount in stocks or mutual funds or gold together then you are making lump sum investments. What you get in return are units (if you are buying into a mutual fund) at the then prevailing net asset value (NAV).
Systematic investment plan
It is more famously known as SIP. It is bit by bit systematic investment. Under this plan your investments are staggered. That is you invest a fix sum either monthly or quarterly in a mutual fund. Say, for example, you commit to invest a pre-specified amount (Rs 500 onwards) every month or every quarter in a mutual fund. You fix a date on which every month or every quarter the amount gets invested. The first investment has to be by a cheque and then you can either give post dated cheques (PDCs) or opt for electronic clearing system (ECS).
In ECS you give permission for the amount to be directly deducted from your bank account on the fixed due date. The units are allocated as per the then prevailing NAV on that day of the month. You get more number of units if the NAV is low and vice versa if the NAV is high.
Sheetal Jhaveri is a financial consultant and can be reached at firstname.lastname@example.org.
Text: Sheetal Jhaveri
Illustrations: Dominic Xavier
Also read: Investment strategy when the markets are down