Major plus points of Lumpsum Investments
When asked to rank various market-linked investments in ascending order, Mutual Funds are at the top. Mutual Funds are the most popular instrument that reaps you good inflating beating returns. Equities and Debts are the two assets you can invest in. You should also consider your goals and risk profile to make an appropriate choice. There are two ways to invest: Lumpsum Investment and Systematic Investment Plan.
Lumpsum Investments are where you invest a significant amount in one go. With SIPs, you make small regular contributions and build your corpus over time. There have been constant comparisons and debates on which investment mode is better. Since both ways follow a different investment approach, their pros and cons are likely to differ. However, there are circumstances where Lumpsum Investments score better than SIPs.
Simple and seamless
With Lumpsum Investments, you need to chip in your Mutual Fund together, and the financial instruments grow and earn you returns by themselves. You need not constantly monitor the market, make variations to your SIP contribution, and adjust to the ongoing market conditioning. Plus, they are a one-time investment. This often works well for investors with no fixed monthly income. They can invest the gathered lumpsum and wait to earn good returns.
Save on charges
Lumpsum Investments save on investment charges, primarily with Equity Mutual Funds. Every time you make an Equity transaction, you need to pay Securities Transaction Tax. This tax gets paid whether you purchase or sell Equity holdings. Since you make contributions periodically with SIP, you purchase Equity holdings monthly. This causes your STT amount payable to rise.
As for Lumpsum Investments, you purchase all Equity holdings together. This often helps to reduce the STT amount payable.
Better capital appreciation
Besides asset allocation, capital appreciation depends on the investment horizon. A longer investment horizon reaps better returns and vice-versa. As mentioned, when you opt for a Lumpsum Investment, you buy all Mutual Fund units at the same time. This ensures all fund units grow steadily in the same time frame. Under SIPs, you buy Mutual Fund units every month. This means the investment horizon of each unit is likely to differ.
A difference in the investment horizon shows a difference in the returns you reap. Even if you redeem all units together, the returns vary. A Lumpsum Investment performs exceptionally well when the markets are thriving. You can make the most of a favourable market position through them. SIPs, on the other hand, work the best when the markets are falling.
Both investment modes have incredible benefits to offer. Consider your investment affordability and risk preference to determine a suitable mode.