Knowing when to take lumpsum & when to take SIP route in mutual funds game

view original post

“For a long time, I used to have vague ideas about the differences between the SIP approach and the lumpsum route in the world of mutual fund investments. It took me a while to figure out the nuances of mutual fund investing and I realized that each of the two approaches serves their own purposes depending on where you are in your investment journey,” narrates Dhruv Malhotra, a 26-year-old content creator based in Lucknow.

Like any other investment avenue, the gamut of mutual fund investments may take a while to get a grasp on if you are a novice investor. SIP, which stands for Systematic Investment Plan is one of those terms that serves as the first stepping stone when investors get initiated into the world of mutual fund investments. What is an SIP? An SIP is a tool that allows you to invest regularly in mutual fund schemes, typically in equity mutual fund schemes. Through SIPs, you can invest a fixed amount regularly and thus it helps you to stagger your investments over a period.

However, as opposed to what many people believe erroneously, SIPs are not the only way to invest in mutual funds. The lumpsum route is another option wherein an investor invests the entire amount of what is available with him/her at a given point in time in a mutual fund scheme at one go. Each approach has its own advantages. There are no rules that prohibit a person who invests through SIPs to make a lumpsum investment when he/she has capital at their disposal that can be invested.

“The trick lies in knowing when and for what purposes do the lumpsum and SIP routes serve investors best. With SIPs the biggest advantage is that the cost of investments is spread over a period of time and thus the average cost of investing decreases. This is because SIPs also allow you to invest in different phases of the market cycle in a disciplined way – you can buy more units when the market is sluggish and this helps you earn high returns in the long run,” says Malhotra.

Investors can amass a large number of units when the prices are low and when the markets are reinvigorated, the prices of those units go up and thus your capital appreciation goals receive a boost. SIPs are best suited for long term equity investment and can significantly absorb the impact of market volatility. You can continue investing for long periods throughout the length of the business cycle and let the power of compounding work its magic.

When to take the lumpsum route?

Lump sum investing in mutual funds should be your approach when you have invested in debt mutual funds for short term goals. SIPs for short term debt mutual funds are of little use because debt funds are usually recommended for an investment horizon that is less than three years.

However, you can take the lumpsum route in equity mutual funds too – supposing you have some extra cash to spare or you made some windfall gains through the sale of an asset or you liquidated a fixed income investment that had attained maturity, you can invest the total amount in an equity mutual fund as a long term investment.

Furthermore, you can opt for an STP (systematic transfer plan) from a short-term debt fund into an equity fund of your choice. With an STP, money will be transferred at regular intervals from your mutual fund instead of your bank account. The advantage here is that if you have lumpsum cash but the timing does not seem right for you to invest a lumpsum in an equity fund, instead of keeping the stash in the bank, you can invest it in a short-term debt fund/liquid funds to keep on earning market linked fixed income return and then using an STP you can gradually invest in equity funds through SIPs so that you do not run the risk of timing the market erroneously.

Shalab Gupta Bibhab, founder of Bibhab Capital says, “This is a million dollar question, what to do and when? In my opinion, SIPs should be done when the future looks very uncertain. These are times when bull markets have reached a euphoric phase or a correction has just started. Lumpsum on the other hand is best suited when there is an overarching sense of pessimism: i.e., when we are in a bear market or the recovery has just started.”

Key takeaways

– Seek professional advice if the clouds of confusion seem too dark for you and you are unable to make an investment move.

– It is always important to remember that SIPs and the lumpsum game are not counters to each other in the gamut of mutual fund investing. Your investment strategy in the long haul would need both SIPs and lumpsum approaches based on your situations and requirements.

– With an STP, money will be transferred at regular intervals from your mutual fund instead of your bank account. The advantage here is that if you have lumpsum cash but the timing does not seem right for you to invest a lumpsum in an equity fund, instead of keeping the stash in the bank, you can invest it in a short-term debt fund/liquid funds to keep on earning market linked fixed income return and then using an STP you can gradually invest in equity funds through SIPs so that you do not run the risk of timing the market erroneously.

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.

SHARE THIS ARTICLE ON

Related Posts