Systematic Investment Plan (SIP) is merely a facility to invest a pre-determined amount on your preferred investment date, each month/quarter. The underlying fund where your money is invested remains the same. Whether you choose to make a one-time lump sum investment or use the SIP facility to invest in this fund, it’s up to you.
If you are finally investing in the same fund, how can one way to invest be better than the other? The choice of whether you use the lump sum route or the SIP route will depend on your cash flows and the current circumstance. For those who earn a regular monthly income, SIPs make perfect sense as they align monthly inflow and outflow. But if your income is sporadic, perhaps lumpsums are the way you’ll choose. You can even make lump sums in funds where your SIP is already active, say if you get a windfall gain or bonus.
SIP is actually a great way to build the habit of regular investing. It is a great way to make productive use of money from your bank account which you may otherwise be tempted to spend. SIP is a behaviour tool which makes us more disciplined and regular with our investments. Because you invest regularly, you are able to invest across market up and down cycles, thus, taking advantage of the near-term volatility. It’s a facility that can be used across fund types; if you want to, you can build your emergency fund using SIPs made in Liquid Funds. You don’t need to have a lump sum accumulating in your bank account for that.
For the regular salaried employee, there are several benefits of using the SIP route. If you were to compare a lump sum and SIP in terms of return, then the lump sum started on the same day as SIP will look better in the long run because the Indian equity market has moved in one direction which is up.
The difference is that the lump sum could have been just a one-time investment of say Rs 1 lakh or 10 lakhs 10 years ago. But by doing a SIP, you would have saved and invested a significantly higher amount of money given that there is something getting invested every month over 10 years and so it’s really the disciplined, regular investment behaviour which is the biggest benefit of SIP.
You can continue your SIP for as many years as you desire. If the underlying fund continues to perform within the upper quartile there is no need to change or stop investing. The good thing about mutual fund investing is that you can withdraw a partial amount for the goals you have marked and leave the rest invested.
If every year you want to increase your aggregate SIP amount, you can simply increase the SIP for your existing fund itself rather than adding a new one. This is known as SIP top up. Top up your SIP, withdraw partial amounts if needed or pause when needed, it’s all possible given the flexibility of mutual fund investing and the SIP structure.
The other prudent way to approach it is to keep a separate SIP for each of your identifiable goals, that way you know where to dip into when one goal is closer to achievement.
Here are 5 key takeaways:
Since SIPs are automated, it is a great way to make productive use of money from your bank account which you may otherwise be tempted to spend.
For volatile assets some form of staggered investing is better and for stable return assets, lump sums can also work well, if you have the capital handy.
SIP can be used to save for any goal – be it short term or long term.
Keep a separate SIP for each of your identifiable goals, that way you know where to dip into when one goal is closer to achievement.
The chances of earning negative returns through SIP investments in equity funds are nil if the holding period is long – 10 years.
The writer is a Chief Business Officer of PGIM India Mutual Fund
SIP Builds Discipline
By: Abhishek Tiwar
