Investing in mutual funds is a smart way to grow your wealth and achieve your financial goals. But how do you invest in mutual funds? Do you invest a large amount of money at once, or do you invest small amounts regularly?

Actually, you can do it both ways. But which is better is the right question. The answer is simple: invest small amounts regularly. This is called a Systematic Investment Plan (SIP).

SIP is a method of investing in mutual funds where you invest a fixed amount of money at regular intervals, such as monthly, quarterly, or yearly.

You can start a SIP with just $10 per month and choose from a variety of mutual fund schemes across different categories and risk profiles. 

What is a Systematic Investment Plan (SIP) in Mutual Funds?

Investing a large sum at once may not be everyone's cup of tea. It's quite easy on pockets if you can invest small amounts regularly and build a significant corpus over time.

SIP investing allows you to invest a fixed amount in a mutual fund scheme at regular intervals, such as monthly, quarterly, or yearly.

The advantages of SIP investing are:

• You can average out the cost of purchase and reduce the impact of market volatility by buying more units when the market is low and less units when the market is high

• You can build a habit of saving and investing regularly and benefit from the power of compounding over the long-term

• You can start with a small amount and increase it gradually as your income and savings grow making SIPs super flexible

Why is SIP the Best Way to Invest in Mutual Funds?

SIP is one of the two ways to invest in mutual funds, the other being lumpsum.

In the lumpsum way, you invest a significant amount in mutual funds at one instead of the regular small amounts in the SIP way.

SIP is better than lumpsum because:

#1 SIP makes investing convenient and flexible

You can start, stop, increase, or decrease your SIP amount anytime. You can also switch between different mutual fund schemes to suit your changing needs and preferences.

For example, suppose you start a Rs. 10,000 per month SIP in a mutual fund scheme, and after a year, you get a salary hike. You can increase your SIP amount to Rs. 15,000 (or anything else) to invest more.

Or, suppose you start a SIP of Rs. 10,000 per month in a mutual fund scheme, and after a few years, you find a better scheme that matches your risk profile and investment objective. You can stop your existing SIP and start a new SIP in the new scheme easily.

#2 SIP helps you save and invest regularly

SIP helps you develop a habit of saving and investing regularly. It automates your investment process and deducts (auto-debits) the SIP amount from your bank account every month. This way, you don’t have to worry about forgetting or skipping your investment.

For example, suppose you start a SIP of Rs. 5,000 per month in a mutual fund scheme that gives you an average annual return of 12%. If you continue this SIP for 10 years, you will invest a total of Rs. 6 lakhs and get a corpus of Rs. 11.61 lakhs.

If you increase your SIP by 10% yearly, you will invest a total of Rs. 9.56 lakhs and get a corpus of Rs. 16.87 lakhs. This shows how a SIP can help you save, invest regularly, and build a large corpus over time.

#3 SIP helps in cost averaging your investments

SIP helps you average out the cost of purchase of mutual fund units over time. It means that by investing a fixed amount every month you buy more units when the market is low and less when it is high. This is also known as cost averaging.

For example, suppose you had a monthly SIP of Rs. 10,000 in a Nippon India Large Cap Fund. The following table shows the NAV of the scheme and the number of units that you would have bought every month for 10 months:

You would have invested Rs. 1,00,000 and purchased 3461.44 units. The value of the investment at the end of 10 months would have been Rs. 1,20,379.43 with an absolute return of 20.4%.

On the other hand, if you had invested Rs. 1,00,000 as a lump sum at the beginning of the period, you would have bought 3086.42 units. The value of the investment at the end of 10 months would have been Rs. 1,07,337.35 with an absolute return of 7.4%. 

This shows how a SIP can help you average out the cost of purchase and reduce the risk of investing in a volatile market.

Note - Markets are unpredictable and there are times when lumpsum investments may work out better than SIPs. But it is very difficult to predict that in advance or during the time of investing making SIPs more reliable than lumpsum.

What To Do If You Have a Lumpsum Amount? Enter STP

If you have a lumpsum amount to invest in mutual funds, you can still opt for SIP-like investment method called Systematic Transfer Plan (STP).

STP is a process of transferring a fixed amount of money from one mutual fund scheme to another at regular intervals (both schemes must belong to the same fund house).

You can park lumpsum amounts in a low-risk (debt) mutual fund scheme, such as a liquid or ultra-short-term fund. These funds typically offer higher returns than a savings bank account and comparable returns when measured against FD interest rates. 

You can then start an STP from the debt fund to the target equity fund. The benefits of STP are:

✅ STPs help in averaging out the cost of purchase of the higher-risk mutual fund scheme

✅ STP help earn returns on the lumpsum amount parked in the lower-risk/debt mutual fund scheme

✅ STPs offer flexibility and convenience identical to SIPs

Conclusion

While both SIP and lumpsum investments have their merits, SIP emerges as the preferred choice for most investors due to its ability to mitigate market volatility, instil discipline, convenience and flexibility.

Moreover, SIP is suitable for all types of investors, whether beginners or experienced, salaried or self-employed, conservative or aggressive.

For those with lumpsum amounts, the strategic use of STP provides a balanced approach, combining the strengths of both investment methods.