How SIP Protocol Works

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Investing can be explained as an action in which you allocate a portion of your income from full-time employment into an investment scheme. You take this action with the aim of generating long-term wealth, which might be helpful in taking care of day-to-day expenditures after retirement. One of the many investment avenues you can consider for acquiring long-term wealth is mutual funds.

Mutual funds are an investment scheme in which an asset management company pools your money along with that of other investors. Once enough money is collected in the fund, the company uses it to purchase financial securities. To invest in mutual funds, you will find yourself with two investment modes. Those two investment modes are a lump-sum investment and a systematic investment plan or SIP.

What is a lump-sum investment?

A lump-sum investment is a one-time payment from an investor’s side instead of a monthly payment just like in the case of a systematic investment plan. While the term ‘lump-sum’ is generally associated with windfall earnings, as it happens to be in cases of a retirement or pension plan. However, in this case, you could opt to allocate funds just one time if you happen to have access to the amount required for investment purposes. For instance, you recently experienced a windfall earning of ₹1.2 lakhs and are thinking of investing it. So, you can choose to make a one-time lumpsum fund allocation instead of allocating it over months.

What are the features of lump-sum investments?

  • Lumpsum is a certain sum of money that’s paid all at once, instead of being paid in regular instalments.
  • All that’s required of an investor for lumpsum payments is access to the entire money and higher risk tolerance.

Tips to keep in mind for lump-sum investments:

  • Please determine your financial goals:

A financial goal can be defined as a monetary target that you want to achieve over time. Goals such as accumulating corpus for your child’s higher education, retirement, marriage, foreign vacation, etc can be considered an example of financial goals. Setting up financial goals will provide you with a clear idea of how much to save and how much to invest regularly for achieving your life goals. Financial Planning help in providing a clear direction to your investments and formulating an optimum asset allocation strategy based on things like your risk appetite, time horizon, and presumed rate of return. Therefore, determining your financial goals is an absolute must if you are considering any type of investment, but it is absolutely essential for lumpsum investments.

  • Please make sure that you have access to the required investment amount:

As mentioned earlier, lump-sum investments are a one-time payment. Thus, if you are thinking of going ahead with this investment option, then, you need to check if you have the necessary balance in your account.

  • Not taking inflation into account before investing:

Another common mistake committed by investors is ignoring the impact that inflation may have on their financial goals. As inflation reduces the purchasing power of money, you may end up with an inadequate corpus that could help you with meeting your financial goals. Hence, while investing, you need to make sure to take the inflation trend into consideration.

What is a SIP?

Under SIP investments, you pay for your mutual fund scheme through monthly deductions. By opting to leave a standing instruction with your bank, you don’t even need to pay yourself. The required investment amount will be deducted from your account automatically.

How do they work?

An Investor opts for a mutual fund scheme after determining their own financial goals and investment horizon. After doing that, people regularly set aside a fixed amount every month to achieve these goals. The SIP auto-debits the predetermined amount from a bank account at already-fixed intervals and then invests it directly in the investor’s preferred schemes. A certain number of units are purchased from your invested principal. The purchase of units is carried out after studying the current market price of the financial instrument. In case you are a risk-averse investor, you can consider looking at SIPs as they are one of the preferred ways of investing when the market is volatile.

Tips to remember while investing in SIP:

  • Please make sure that your earnings remain consistent:

Systematic investment plans are considered a very convenient way of investing for middle-class Indians. In contrast to lump-sum investments, where you invest in one go, with SIPs, you can continue fund allocation into the mutual fund scheme for decades and decades and that too at a very low amount. So, if you are thinking of going with SIPs, please make sure that you have access to the required investment amount.

  • It would be better if you have a long-term goal:

Just as is the case for investments in general, even with a SIP, before beginning your investment journey, you need to determine the duration for which you can remain invested. Also, while investing, you need to be prepared to face market fluctuations. There might be days when the market might be soaring. And there might be days when it may come to a stand-still. So, if you were to have a long-term goal, it would give your investments some time to grow.