Mutual funds work the best when you invest according to your goals. Goals help you set a plan and choose a fund accordingly.
There are two ways you can invest in a mutual fund here – you can either invest a lump sum amount of money at once or invest monthly through SIP. Both investment options could be suitable for investors if their income and budget allow for the same. But what about students? They tend to have limited or no income. So, is a lumpsum investment even possible for them? Let us examine.
Lump sum investments
Lumpsum investments in mutual funds are when you invest a significant sum of money at once in a mutual fund. Below are the factors that you can consider while choosing the lump sum option.
- Lump sum investments are meant for capital appreciation pr protection than corpus building. Hence, the term of the investments can be shorter as well. The biggest prerequisite here is that you should have a considerable amount of money in hand.
- Lump sum investments require a thorough analysis of market conditions. Since you are investing a considerable sum of money, it is wise to find the right time to invest. The right time is usually a point from which the fund has a chance to grow.
- Because of the exact reason, lump sum investments can be a tad bit riskier. For instance, if the fund you invest in goes down significantly right after you invest, you will suffer a significant loss.
- Since you will be dealing with a larger corpus, you may also need to keep a closer eye on the market conditions. You have to ensure that the fund is performing well, and if there is a chance of it going down significantly, you may also take necessary actions. But one thing to understand here is that redeeming your fund in case of minor fluctuations is not recommended. Most mutual funds are designed to grow over a more extended period, and patience is of utmost importance.
A systematic investment scheme or SIP is a scheme where you can invest in a mutual fund in monthly installments. The goal of SIP is usually corpus building over a longer period. Therefore, SIPs may need more time to be fruitful than lump sum investments. Below are a few factors that you can consider if you choose SIP.
- The biggest advantage of SIP is that it helps you start with a low amount of investment, even if you have just Rs.500, to begin with.
- SIP investments’ goal tends to differ from that of lump sum investments. While lump sum investments are primarily aimed at capital appreciation or protection, SIP is aimed at corpus building.
- SIP can help you accumulate significant wealth over a longer period if discipline is kept. The 15x15x15 investment rule is one example of this. It says that if you invest Rs. 15,000 per month in a mutual fund that gives you 15% returns for 15 years, you can accumulate a wealth of Rs.1 crore.
SIP vs lump sum – which is better for students?
When it comes to students, affordability also becomes a factor. Most students, even those with a reasonably steady income from part-time jobs, may not have a significant corpus for lump sum investment. At the same time, if a student has a fund their parents made or is otherwise given to them, they could try investing the same in mutual funds for capital protection or appreciation.
SIP and lump sum options are proven and could benefit if invested correctly. Analyzing your financial situation is the single factor affecting your choice here.