Should you invest lump-sum or through SIP? Market trends may be the key

Navneet Dubey

Moneycontrol News

Most often it is argued that investing in mutual fund through a systematic investment plan (SIP) mode is the best way to make your money grow. Entering the market through SIP does not require you to time the market and helps you in rupee cost averaging, minimising the investment risk. However, it’s not as easy as it looks. Whether you are investing through a lump-sum mode or an SIP mode, you always need to be sensible in your investment decisions.

Anjaneya Gautam, National Head Mutual Funds, Bajaj Capital said that SIP and lumpsum are two approaches to investing, depending on the availability of funds for the investor and readiness to invest in one go or small installments.

While both approaches have their respective suitability for the investor, returns may be linked to the phase of the market cycle. If markets are in one way upward movement, lumpsum investments tend to perform better than systematic (SIP/STP). SIPs perform better in volatile or bearish markets as compared to lumpsum investments. An external factor to consider is the performance of the underlying scheme.

“If we look at the history of equity markets, one trend does not hold true all the time. SIP investments, due to their periodic nature, invest on a fixed frequency and get the benefit of fluctuations of equity markets. SIP is also a better approach for salaried investors, as it goes very well with the availability of funds to save and timing of salary credit. Investing at all levels of fluctuating equity markets is one the best way to ride through the volatility,” said Gautam.

“The classical argument in favor of SIPs is that they help mitigate market timing risk. But if the markets are in a unidirectional bull run, then SIPs will underperform lump sum investing,” said Kaustubh Belapurkar, Director Manager Research, Morningstar Investment Adviser India Pvt. Ltd. “But we all know that such a market is hypothetical and volatility is very much a given, even though over the long term the market is trending upwards,” Belapurkar added.

SIPs in equity funds help in insulating investments from a crash. The advantage of SIPs is that even in a volatile market, you keep investing and buying at different levels. If the markets are high, you buy fewer units of the fund and if the markets are low, you buy more units for the same amount. This helps you ride out the volatility and earn better returns.

Belapurkar added further, “SIPs work well on two fronts, they reduce market timing risk by spreading the investments out over a period of time and secondly SIPs help instill financial discipline as it encourages investors to save on a frequent basis to make good these investments.”

Archit Gupta, CEO, and Founder, ClearTax validated this with an example. Suppose you had Rs 2.3 lakh to invest in August 2015. You invested the entire amount in a lump sum on 20 August 2015 in a diversified multi-cap fund like HDFC Equity. Then, the markets crashed by over 1,600 points on 24 August 2015, which is something you wouldn’t have known a few days before. So, how would your lump sum investment of Rs 2,30,000 have fared? Immediately after a month, your investment would be down by more than 6%. If you had been brave enough to continue holding your investment, it would have grown to around Rs 2.7 lakh by 21 June 2017. But most investors would have run away after seeing a major loss. Very few would have stayed invested.

But suppose, instead of investing a lump sum, you decided to start an SIP of Rs 10,000 in the same fund. Then, till 21 June 2017, you would have invested Rs 2,30,000 and your investments would have grown to over Rs 2.8 lakh. A return of more than 20% per annum.

“This is the real benefit of investing through SIPs. We never know when the markets will crash and it is best to spread our investments over a period of time instead of taking the risk of catching a peek through a lump sum investment,” he said.

Investments are always done in a way to generate good returns. SIPs are a good investment process which inculcates the habit of doing disciplined savings, also regularise the investment of individuals into the market by minimizing the risk. However, if you want to invest in mutual funds for the purpose of doing tax savings then you should ideally go for lump sum investing.

Investing through lump-sum or an SIP mode differs from individual to individual, which may be related to their cash flows, holding period of investments, risk appetite or any other requirements. Therefore, before making any investments, it is always better to take guidance from a financial advisor who can help you out in proper investing at that point in time.

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