When you invest in mutual funds, you are likely to face this situation sooner or later.
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You receive a bonus, sell an asset, or simply find disposable cash in your hand. You wonder whether you should invest it all at once or continue with your SIP.
Today, investors have plenty of options online. However, the most logical path is to maintain discipline and take a methodical stance to your investments. With dedicated calculators to plan your SIP or lumpsum investments, you can make informed decisions.
What are Lumpsum and SIP Investments?
When you make a lumpsum investment, you put a large amount of money into a mutual fund or asset in a single transaction. With SIPs, investors contribute a fixed amount at regular intervals. This helps them spread their investments at different points in the market.
A lumpsum investment exposes your entire capital to the market instantly, which makes it prone to volatility. However, since you get the opportunity to enter the market at different levels with SIPs, the cost is averaged.
If you are having surplus cash at your disposal, you may consider investing in a lumpsum. However, SIPs continue to be the first choice for those with regular income.
What Does a Lumpsum Calculator Actually Tell You?
Using a lumpsum calculator,you can estimate how much the amount you put in the market as a one-time investment could grow over a specified tenure. A certain rate of interest is assumed during the calculation. While using this calculator, you need to provide these details:
- Your investment amount
- Time horizon
- Expected returns
The calculator does the math and show you the potential value. This calculator will help you understand the power of compounding when you keep your money invested for long periods.
Even when the market corrects or remains undervalued, a lumpsum calculator can help you evaluate the potential long-term returns.
What a SIP Calculator Helps You Visualise
An SIP calculator works in a different way. In this case, you don’t make a single investment. The calculator displays how small and regular contributions can help you accumulate wealth over time. In this calculator, you need to provide:
- The monthly investment amount
- Duration
- Rate of interest
The calculator will help you map the journey. An SIP calculator helps investors understand why consistency matters during these investments. It also shows how rupee cost averaging reduces the impact of volatility in the market. When the market falls, your SIP gets the opportunity to buy more units. On the other hand, your portfolio benefits from the accumulated units during recovery cycles.
Lumpsum vs SIP – What Matters for Investors
Now that you understand the purpose of separate calculators for SIP and lumpsum investments, check out what matters for investors as they accumulate wealth through these models.
1. Market Timing vs Time in the Market
Timing plays a significant role when you invest a lumpsum amount. In case you invest a sizable amount just before a correction, the market will test your patience while it recovers. SIPs, on the other hand, remove the market timing priority from the equation. You simply need to maintain consistency with your investment.
2. Investor Psychology and Behaviour
Let’s not deny that emotions influence the returns from our investments. When the market falls, fear takes over. During rallies, investors often get carried away by greed. Often, these emotions lead to poor decisions. SIPs automate discipline, which makes them work better for many investors. If you choose to invest in lumpsum, you need more emotional control.
3. Risk Management and Volatility
Both lumpsum investments and SIPs are affected by volatility, but in a different way. In case of lumpsum investment, you feel the full impact immediately as your entire capital is exposed to the market. However, SIP investors don’t feel this discomfort too much since the price gets averaged out over time.
When Does a Lumpsum or SIP Make More Sense?
Lumpsum investment is ideal for those who have:
- A long investment horizon
- Strong tolerance to risk
- Surplus capital that wouldn’t be required in the short run
For a good entry point, look for market corrections.
For those with regular income, SIP is the best approach to investing. This approach also involves low stress and is suitable for uncertain markets. If you have long-term goals and can remain consistent with your contributions, you may consider creating an SIP in a mutual fund.
Use an SIP calculator to visualise how your wealth can build over time.
Conclusion
Many investors deploy a smart strategy where they continue with their SIPs while investing a lumpsum amount only when they have surplus cash in hand. In these situations, they use both the calculators separately to map their wealth-building journey.
Just consider your comfort level while investing, along with your flow of cash, before you finalise your decision.
