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Deciding your method of investment

Under a systematic investment plan the investor regularly puts a fixed sum of money each month into a particular investment, writes Arnav Pandya.

india Updated: Apr 29, 2008 00:16 IST
Arnav Pandya

Should I take a Systematic Investment Plan (Sip) or get done with investments in one go? This is a question faced by most investors. While help is at hand to aid them in deciding, the final decision lies with the investor. Before you go for any one of these methods, it is necessary to know what each of these are and the fundamental difference between the two.

One-time investment

A one-time investment is when the investor puts all the money available with him or her at one go. This will mean that they will invest the entire sum at a specific point of time and the cost of their investment at that time becomes their base. After this, the returns earned by them depend upon the movement of the prices from the cost level that they have ended up with. Many investors who are sure about their investment goals and position use this method of investment.

Systematic investment plan

Under a systematic investment plan the investor regularly puts a fixed sum of money each month into a particular investment. This will mean that the cost for the investor will average out over a period of time, as the purchases will take place through both good and bad times. People who are not sure about the way in which the market will swing and hence want to reduce the risk adopt this route.

Surveys

Some studies will show that a one-time investment yields a higher return and this is especially true when the markets are rising. Some other studies will point to the fact that a systematic approach gives a better result. This leaves the investor confused about the method that they have to adopt which will give them a higher success ration.

Knowledge

If one is sure that the markets are going to rise then putting the entire amount in an investment at one go is the most natural thing to do. However this is never the case because sudden change in events can also lead to a fall, under which case the loss can be as large. Thus a systematic approach is adopted to lay the groundwork for making the investment. Investors need to be alert about the risk involved because this can lead to a loss that might eat away a large part of their capital.

(The author is a certified financial planner)