Put your money where the ‘bulk’ of your mind is

Lump-sum investing works best when the investment in a desired fund is low — say at about 5-10% — as any loss or gain it makes will not materially impact the overall returns

December 04, 2022 10:33 pm | Updated 10:33 pm IST

Most debt fund categories, other than those with longer-term portfolio maturities or predominantly invested in gilts, have low volatility. These fund categories also do not see big return dips, barring credit events.

Most debt fund categories, other than those with longer-term portfolio maturities or predominantly invested in gilts, have low volatility. These fund categories also do not see big return dips, barring credit events.

If there’s one thing that mutual fund investors would agree on, it is that SIPs are great ways to be investing. True. But does it mean that lump-sum investing is not a good idea at all? No. There are a few important scenarios where investing in one go, instead of spreading it out through SIPs or systematic transfer plans, is perfectly acceptable.

Investment amounts

When you find yourself with a surplus sum to invest, you wonder whether you need to set up an SIP/STP for this amount or if you can invest in one go.

An easy answer is to look at how much this investment amount is in relation to your overall investment or your investment in the desired fund.

If it is low — say at 5-10% — then lump-sum investing will be absolutely fine to do. Why? Because when the proportion of the investment is very small, any gain or loss it makes will not materially impact overall returns.

That means that any risks that lump-sum investing would involve are minimal and that staggering investments through SIPs or STPs are ineffective.

For instance, say you had ₹1 lakh to invest in January 2020 and you want to invest in the Nifty 50. Now, say your existing investment was ₹5 lakh in the Nifty 50, making the fresh investment 20% of it. In this case, running a 10-month SIP would improve your overall IRR by 0.5 percentage points (as of November 2022) than a lump sum.

But if your investment was, say, ₹15 lakh then there’s virtually no difference between the SIP and lump-sum return.

Investment destinations

The point above goes for any fund, whether debt, equity or hybrid. But where you are investing can also tell you whether lump-sum investing is fine to do.

Most debt fund categories, other than those with longer-term portfolio maturities or predominantly invested in gilts, have low volatility. These fund categories also do not see big return dips, barring credit events.

For example, the very short-duration categories saw one-month losses about 2% of the time in the past 10 years.

Short duration and banking and PSU funds slipped into one-month losses just 10% of the time.

Similarly, arbitrage funds and equity savings funds also see low-return volatility and low loss probabilities.

This means two things. One, the risk of mistiming is low. Therefore, lump-sum investing in these funds does not lead to the problem of investing at peaks unlike equity-based funds.

Two, without volatility or big corrections, cost averaging benefits do not really come into play.

Consequently, SIPs don’t offer that particular advantage over lump-sum investing.

All this aside, categories such as liquid or the very short-term funds are primarily used for short-term investment horizons.

This also limits any specific benefit of investing through SIPs. For these funds, therefore, you can invest via lumpsums if you wish to. You do not have to necessarily use SIPs.

When markets call for it

In equity funds, lump-sum investing is risky because there’s the chance of investing at the wrong time and see your returns vanish.

Calling market bottoms is also genuinely hard. SIPs work around this because it enables investing at different market levels.

But sometimes, it can be clear that markets are correcting if you’re a touch market-savvy or able to understand market movements in general.

In March 2020, for instance, or earlier this year. When you can see that markets have been steadily heading south for several weeks and market commentary suggests that it’s not all sanguine, you can use such opportunities to your advantage through lump-sum investments.

That is, even while your SIPs run, you can in addition deploy lump sums during market corrections. This will enable better capturing of the opportunity in cheaper stock prices than relying on SIPs alone. Short-lived corrections are also harder to catch through SIPs.

No waiting

You do not need to wait for the market bottom to invest; even capturing part of the correction using lump sums in addition to SIPs will be useful.

Lump-sum investments give you some degree of control over when to invest, unlike an SIP which invests both during market rallies and corrections.

You could break your surplus up into smaller amounts and deploy these through multiple lump sums at different points during the correction as well.

(The writer is Co-founder, PrimeInvestor.in)

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