From your wealth advisor to your bank manager to mutual fund (MF) house brochures, the gyan is similar — your money is best off divided in tidy little systematic investment plans (SIPs).
SIPs are fixed monthly payments transferred from your bank account to purchase units in specific MF schemes. Each month, for the same investment, you get more or fewer units depending on how they are priced at that point of time.
Where SIPs score
The advantages are aplenty. SIPs introduce discipline in your financial habits, ensuring some of your money is put away each month toward investment — similar to a bank recurring deposit, but probably earning greater returns. If you plan to stay invested in the MF scheme for a while, SIPs bring down the average cost of units purchased. This is because they allow you to purchase units across various market cycles, so the cost per unit is averaged out over the total investment period.
Further, SIPS let you compound your investment in select funds — the returns can be reinvested in the funds so that you earn higher returns.
The biggest advantage of SIPs, as is oft repeated, is that they are relatively stress-free. You can make an informed decision on investing in a fund, take care of the documentation including standing instruction with your bank, and more or less forget it. The SIP will work to protect you from market vagaries and fetch you as high a return as possible.
‘Couch potato investment’
The last, perhaps, is exactly what could also be used as an argument against SIPs — they could turn you into a ‘couch potato investor’. Caught up with work stress, domestic commitments and other demands, you may cease to give adequate thought to your finances once you know a sizeable sum is going to your investment kitty every month.
“I’m not a great fan of SIP,” an investment professional who wished to remain anonymous told The Federal. “I advise it only for clients who lack financial discipline — those who I suspect would squander money unless it’s channelled into SIPs every month.”
Lumpsum investments in MFs certainly hold an element of risk. If you make a bad choice, you lose a lot of money. However, this may induce you to expend more time and energy in research. Simple steps such as regular reading of business sections in newspapers, talking to friends or relatives who invest routinely in equity MFs, or consulting an astute wealth manager can sharpen your investment skills considerably over time.
And your ‘lumpsum’ needn’t be ₹1 lakh. It could be as small as ₹5,000. The discipline of spending a couple of hours a month thinking about how best you can invest that amount could be an excellent exercise in financial discipline.
“In a long-term investment — say, 10 years — there’s little difference between SIP and lumpsum in terms of returns,” Srikala Bhashyam, Managing Partner at investment firm RS Consultants, told The Federal. “Which mode you opt for depends entirely on your risk appetite and your investment horizon.” The longer the latter is, the more you can go for lumpsum.
But, unless you are absolutely confident about your risk-taking ability, it would be wise to not place too many eggs in the lumpsum basket — to start with, and even later. Rather than viewing the equation as ‘SIP vs Lumpsum’, consider it ‘SIP, Lumpsum and Others’, the last being non-MF investments such as bank RD/FD, post office savings, etc.
Here, again, you can divide your MF money across SIP and lumpsum in tandem with your risk appetite — the lower it is, the more you should stick to SIP. But that shouldn’t be your only criterion. The market cycle matters, too. When it hits rock bottom, a lumpsum investment will come out tops, earning you considerable returns when the market improves. On the contrary, when the market is doing well, a lumpsum doesn’t make much sense since you’ll end up paying more for fewer units of the MF.
Recalling the market crash in March 2020, Bhashyam said those who invested lumpsums then had made about 70% returns, though “that’s probably a once in a lifetime opportunity”.
Yet, she added, history has shown that the market does correct itself once or twice every year, so losses are mostly evened out. These trends, of course, require a seasoned pair of eyes to spot and leverage.
Systematic transfer plans
Offering a golden middle way between SIPs and lumpsum investments are systematic transfer plans (STPs). These are basically a way for you to make a planned transfer of funds from one scheme to another of the same fund house.
For instance, if you want to invest ₹1 lakh in an equity scheme but are nervous about doing it at one go, you can put it in a debt or liquid scheme where the corpus will earn you marginally higher returns than your savings bank account. You can then instruct the MF company to transfer ₹10,000 every month to the desired equity scheme, till the entire amount is moved. Midway between this arrangement, if you lose confidence in the equity scheme, you can end the transfers.
But this may not be a tax-efficient solution, Bhashyam cautioned, as the money parked in the liquid fund is taxed.
You can, however, try STPs before you evolve further as an investor and gain enough confidence and skills to invest a portion of your money directly in lumpsums.