In this topic, our vital aim is to learn how to use SIM or Lump sum in investing in equity mutual funds. It’s not about SIP vs Lumpsum in mutual funds. We shall learn it through some interesting points below;
- Why and when to invest through SIP
- Why and when to invest through Lumpsum.
- When to stop investing and then when to start again via SIP
These three points have been applied in our practical life, which gave us a better yield over time. Thus, we would like to share some knowledge on these three points.
On average, we must know or learn detailed knowledge about, when to stop investing, when to begin investing again, when to invest in lumpsum, and where to invest the monthly amount when we stop SIP.
Only this knowledge will help us to gain 10%-12% in Index mutual funds or Large cap mutual funds. Before all, you should have basic knowledge of Equity Mutual Funds and strategies to pick mutual funds
Why and When to Invest Through SIP?
By selecting the SIP method, you may invest money at regular intervals each month, which will result in savings before you spend it. It gradually but surely instills financial discipline and aids in future return fulfillment.
What is SIP?
SIP is an abbreviation of a Systematic Investment Plan. In simple, a Systematic investment plan is investing a particular amount consistently on a specific registered date every month.
You have to invest the same amount with which you have started, you can increase, decrease, or stop the SIP amount whenever required.
Advantages of SIP
- The main advantage of SIP is, that you will develop the habit of consistency and discipline in financial planning and management.
- If you are a beginner to equity mutual funds with a mind of SIP or Lumpsum. SIP will be the best way to learn and understand the market, as you will start investing some thousands, and Emotional losses will not affect you much affected.
- The main benefit of SIP is, that you will be purchasing the fund’s NAV at the Growth Phase (The investment value increases) and degrowth Phase (The Unit of funds increases), this will lead to an averaging of investment and in the long run, it yields a huge CAPITAL GAIN.
When to Invest in SIP
As we mentioned earlier, you can start your SIP when you are a beginner to equity mutual funds or when you start a fund.
You can do SIP, while the country’s economy and market are in the growth phase.
Benefits of SIP over Lumpsum in Mutual Funds Investment
Case Study: SIP 2000 per month for 20 years
For an assumption, let us consider a Person ‘ABC’ starting his investment in a large-cap fund. As a beginner, he starts with Rs. 2000 per month and plans to invest for 20 years, the return that he is looking for is 12% per annum. Let’s see how much ABC invests and, how much ABC gets as a return, what is the capital gain.
- The total amount invested is Rs. 4.8 Lakhs
- The total wealth gain is Rs. 15.18 Lakhs
- The total Maturity amount is Rs. 19.98 Lakhs
So, by SIP for 20, looking for a 12% return, you can earn almost 4 times the amount you invested.
Why And When To Invest Through LUMPSUM
Lumpsum, in simple terms, is defined as investing a bulk amount or total savings in a fund in a single transaction.
When to invest as Lumpsum?
Investing in a lump sum needs great knowledge and controlling emotions because the lump sum amount should not be invested in a growing market. It should be invested when the market touches its bottom, but no one can predict the market value at any time.
Better if you invest at the time of recovery (the point at which the market starts to grow after touching its lower bottom).
Benefits of Lumpsum
If you invest as a lump sum with greater market knowledge at the correct time of the market bottom, you can wisely yield a return more than compared to investing as a SIP.
If you invest Rs. 1 lakhs in Lumpsum and expect a return of 12% per annum in a large-cap fund, the return after 20 years will be 9.64 Lakhs.
To check the Lumpsum calculator, please click here
Lumpsum earns you almost 9 times the amount you invested.
This is the huge difference between investing in SIP and Lumpsum, as the reward is higher with Lumpsum, the risk is also high. Unless you can’t control your emotions, even after learning the market behavior, please avoid investing as Lumpsum, SIP will be the best option for those who handle predict the risk and emotions.
As we have found out that Lumpsum can yield 5 times the higher capital gain than SIP, we can’t invest in Lumpsum all the time, there is some particular period of the market where we can invest in Lumpsum. It’s always best to invest as Lumpsum when the market starts to recover. At other times if you invest in Lumpsum, it may lead to a lower yield than SIP.
When To Stop And Start Investing Via SIP
Stop SIP:
- When the market is overvalued situation i.e. when the Nifty index P/E is more than 20-24. Which means the market is 20 -24 times more than the value of its earnings.
- Also, when the market starts to fall in an economic crisis like the 2008 economic crisis & 2020 COVID-19 crisis.
- You have to stop your SIP and accumulate your funds in Debt funds (Liquid Funds, Ultra Short Funds, Gilt Funds, etc.)
Note: we will be learning in detail about the Debt market in mere future
Start SIP Again:
Starting SIP again is the phase, where you can invest as a lump sum.
In the above graph, we have to learn from history,
- During 2008, when there was an economic crisis, the market fell to 3500 from 6154, and it took almost Jan 2010 to recover. This is the phase where you can start SIP again.
- You have to do SIP till the NIFTY P/E reaches 20-24 when you feel the market is overvalued, stop SIP.
Learn from History:
- In the same way, currently, due to COVID-19, the market has fallen from 12361 on 12th Jan 2020 to 7900 on the 23rd of March.
- Still, The market has not reached its bottom as the market is more volatile, now stop investing in both SIP and LUMPSUM, we all will get the opportunity to start SIP again and to invest in LUMPSUM.
Till then save your money in good CRISIL-rated Debt funds, and you can invest in Lumpsum to yield more capital gain.
Conclusion
- Foremost SIP and Lumpsum are different from each other. People should know to differentiate from each other and find which is best.
- An intelligent investor should merge both SIP & Lumpsum’s advantage in mutual funds and make your capital grow.
- When the market is overvalued, stop SIP and invest the same in Debt funds, and when the market crashes and starts to recover, Start SIP and Lumpsum.
- You have to be careful, Investing as Lumpsum needs high market knowledge and emotional control, if not please do Lumpsum investing, continue with SIP
- Always, learn from history as history always repeats.
This subject is completely taken from a practical sense from most of the successful financial leaders and even from my mentors and myself.
If you have any thoughts or comments please do share with us. Also, if we need to cover up on any specific topic please let us know. We will work together to bring valuable content to enhance the wealth of your life.