In this video, we will be talking about the two most popular methods of investing in mutual funds i.

In this video, we will be talking about the two most popular methods of investing in mutual funds i.e via SIP mode or via Lumpsum route. Also we will understand as to which is better SIP or lumpsum. Traditionally, people would invest in a fund by depositing a lump-sum amount in the scheme. However, with the risks associated with giving away a sum of money on a long-term basis, highly risk-averse investors stayed away from funds.

Because of this, the mutual fund industry developed a systematic method of investing in funds for such investors. This other method is most popularly known as Systematic Investment Plan or SIP. So, what is an SIP?

The term “SIP” stands for Systematic Investment Planning. It is a periodical form of investment where investors can invest an amount of their choice on a monthly, weekly, or quarterly basis.

How does an SIP work? At a fixed date every month, week or quarter, the money we deposit is used to purchase units of the mutual fund scheme as per the NAV on that date.

This amount is usually lesser in comparison to a lump-sum investment, and the minimum amount most schemes accept for an SIP is Rs. 500.

Apart from the minimal investment, another benefit of an SIP is the benefit of rupee cost averaging.

If the net asset value or the NAV falls, we will be able to purchase a higher number of units than before.

Let us understand this with the help of a simple example.

Suppose you have decided to set up an SIP of Rs. 1000 per month and the NAV as on that date is Rs. 50. Therefore, you have essentially purchased 20 units of the fund.

What will happen if the NAV falls to Rs. 40 next month?

Depositing Rs. 1000 can get you 25 units of the fund. Therefore, when the NAV will rise in the future, the value of your investment will increase due to the increase in the number of units.

An important question arises at this point – which one is better – a lump-sum or an SIP?

The answer to this question can depend on two criteria – the stock market conditions, or our ability to constantly keep track of the market.

When it comes to stock market conditions, it is seen that a lump-sum performs better than an SIP when the stock market is on a constant high.

Conversely, with rupee-cost averaging, SIPs perform better when the market is constantly declining.

Such constant market conditions are rare, so let us look toward the second criterion to answer our question.

A lot of us investors belong to the working class, and therefore it is impossible for us to constantly keep track of the market. Therefore, with an SIP, we can be assured of uninterrupted investment without the hassle of having to do it ourselves.

Additionally, when the market seems to decline, a lot of us might feel panicked and we might want to withdraw our investments.

Here, an SIP helps us keep our calm by automatically investing for us and spreading our investments over time as well.

Therefore, an SIP is a better and an easier way for us to invest our money over time.