Millennials are increasingly focusing on wealth creation strategies that align with their financial goals and risk tolerance. The popular investment strategies available like Systematic Investment Plans (SIPs) and lump sum investments stand out as viable options. This guide aims to provide a comparative analysis of these two investment approaches, helping millennials make informed decisions that can help them with their financial objectives.
Analysing two contrasting approaches: SIPs or lump sum?
SIPs and lump sum investments are two different modes of investing in mutual fund schemes.
- The volume of the investment amount is very different
Millennials who do not have access to a large investible corpus might not find lump sum investments very convenient. Lump sum investments require investors to invest a significant corpus at once. This is in contrary to SIP investments, which require investors to contribute in smaller portions. Investors can start their SIP investments with ₹ 500 monthly.
- Market fluctuations affect lump sum investments more
If the market takes a dip shortly after a lump sum investment, the investor may bear losses. SIP investments, however, are less susceptible to market fluctuations. SIPs help mitigate the impact of market volatility through a concept known as “rupee-cost averaging”, by spreading their investment over time.
- SIP investments help investors benefit from rupee-cost averaging
Rupee-cost averaging works on the principle of an investor buying more units when the NAV (Net Asset Value) of a fund is low and fewer units is when it is high. This helps average the cost of their units over time. As a result, investors benefit from a lower average cost per unit, which can lead to potentially higher returns over the long term. SIPs allow investors to take advantage of this strategy and build wealth steadily. At the same time, lumpsum investment allows investors to take advantage of market dips by investing a large amount at once.
- Investors can gradually increase their SIP contributions over time
SIPs offer flexibility in terms of investment amount. Millennials’ income often rise as they progress in their careers. With SIPs, investors can gradually increase their monthly contributions as their financial capability increases. This approach allows them to adapt to changing circumstances and ensures that they are consistently saving and investing for their future.
- SIP investments are suitable for long investment horizons
SIPs are ideally suited for long-term investments, as they allow investors to slowly build a corpus, with the help of compounding. SIPs also help investors inculcate a savings habit and enables them to harness the power of compounding, which can result in substantial wealth creation over time. At the same time, lump sum investments may be suitable for both long- and short-term goals, depending on the fund chosen.
How to calculate SIP returns using an SIP calculator?
An SIP calculator considers factors like the desired corpus, the expected rate of return, and the investment duration. By inputting these parameters, investors can estimate the monthly SIP amount required to reach their financial goals. An SIP calculator helps investors stay plan their financial objectives and ensures that they allocate their resources effectively.
SIPs and lump sum investments have their unique advantages. Investors should understand their unique characteristics and choose the approach that aligns best with their financial aspirations.