Should I make a lump sum or SIP investment in equity funds?

Mutual funds are a pool of professionally managed funds that invest across multiple asset classes. AMCs own mutual funds where investors with a common investment objective invest their money in these funds. This pool of funds is later invested in various money market instruments for income generation. The performance of a mutual fund depends on the performance of its underlying assets. Here’s what Securities and Exchange Board of India (SEBI), the regulator of securities and commodities here in India has to say about mutual funds –

 “A mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

There are multiple mutual fund categories for investors to be able to distinguish between multiple mutual funds and make an informed investment decision. Equity funds are the most sought after mutual funds. An equity fund invests 80 percent of its total assets in stocks and other equity related instruments. Since an equity fund predominantly invests in equity markets, they are highly volatile in nature. If you make the entire investment amount right at the beginning of the investment cycle, you will end up exposing your entire investment amount to volatile markets. Equity markets are unpredictable and there is a good chance of your portfolio incurring losses. If you aren’t sure how much you need to invest every month to achieve your financial goals, you can always take the help of the SIP calculator which is available for free use online.

Instead, if you are a SIP in equity funds here are some of the things that you will benefit from:

SIPs can allow investors to benefit from power of compounding

In mutual funds, compounding refers to the interest earned on the interest earned from the initial investment amount. The power of compounding is an ideal way to allow small SIP investment amounts to multiply and grow into a large corpus.              

Investors can invest according to their risk appetite

The beauty of SIP investments is that one does not need to have a large capital as principal amount. One can invest small fixed amounts in equity funds at regular intervals as long as this investment amount meets the minimum investment requirement mentioned by the fund in the offer document.

SIPs allow rupee cost averaging

When the net asset value (NAV) of an equity fund is high, lesser units are allotted to the portfolio. Similarly, when the NAV of an equity fund is low, more units are allotted. This is referred to as rupee cost averaging and generally leads to the appreciation of the rupee in the long run.       

SIPs are flexible

Another advantage SIP investments hold is that they are flexible in nature. Although it is a good idea to invest at regular intervals in a disciplinary way, if you do not have the money to invest in a particular month’s SIP, you can skip the SIP and pay in the following month. There are no charges or penalties if you aren’t able to pay that month’s SIP.