SIPs or lumpsum? Which is the right way to invest in mutual funds while lowering risks

The total value of investments from clients managed by mutual funds in India stands at more than Rs 37 lakh crore as of 2022, despite a pandemic slump. Although online services have made mutual fund investments easier than ever before, the growth rate of assets under management in India remains 16 per cent as compared to the global average of 74 per cent. This indicates that the Indian mutual fund space is still underpenetrated and there’s a lot of room for growth.

Mapping out your investment path

Since the time is right to invest in mutual funds for lucrative returns, it’s important to pick the right funds and the correct way to invest in mutual funds. For instance direct investment schemes are preferable to regular plans, since less money is spent on administrative and operative expenses of agents, which means that returns will be higher. Similarly you have the option to go for a lumpsum investment or to pick a systematic investment plan (SIP), and the choice can be confusing.

Placing your eggs in one basket

Now a lump sum investment is a popular way to invest in mutual funds, where you park all your funds in one scheme, but then that also exposes you to a higher risk. One can invest in a fund with a balanced mix of stocks and bonds, but the risk factor goes up if you seek high returns. In such a scenario, diversifying funds across different companies is more advisable.

Slow and steady way to achieve growth

SIPs on the other hand are funds which allow you to invest with a long term outlook through installments, in accordance with your risk appetite. They address key issues, which are limited funds for investment and the impact of volatility in the stock market. For instance you don’t need a lot of money for investing in SIPs, since Rs 500 is enough for the first installment. This creates scope for slow and steady growth, and also allows you to make initial mistakes since a large amount won’t be at stake.

One more advantage is that investment is automated in SIPs, which makes sure investors stick to their plan. It’s also ideal for people earning a monthly salary, as they only have to add a portion of their earnings to their corpus which grows over a longer period of time. You don’t need to be worried about the value of stocks which may drop due to turbulence in the markets, since installments for the SIP will continue to build your corpus irrespective of changing conditions.

Time is money and the biggest advantage of SIPs over lumpsum investment is that you don’t have to wait till you save a large amount, and can gain more by investing in a fund early on.