If the market continues to grow, then lump-sum investment yields higher returns, whereas if it continues to fall, SIP investment is better (fewer losses than lump-sum investment in such a scenario). It depends on the future return sequence that the investor gets.
Due to their structural nature, SIPs reduce this risk of being wrong as investment spreads. So asking if this is the right time to invest in SIP is immaterial as SIP spreads out your investments. Your returns will, of course, depend on how markets play out during the spread-out period.
SIP is also suitable for small investors in terms of their cash flow perspective. They rarely have access to a large lump sum that is 'surplus enough' to be available for long-term investment. Remember that SIP is a tool to optimize your returns and match your investment needs with your cash flows. It's not the magician's magic to generate superior returns to lumpsum investing.
A smart investor would recognize the bottom-up market and invest in one go. But we're not all smart. So if you're not sure if it's the right time to invest in one go, you can even deploy your lump sum gradually. One way is to invest the lump sum in the debt mutual fund and gradually deploy the money using the STP or Systematic Transfer Plan to the equity fund.
The Franklin Templeton Mutual Fund introduced SIP more than 15 years ago. It was a simple idea to buy mutual fund units every month for a fixed amount of money. When markets are low, you'll be able to buy more units, and in high markets, you'll be able to buy fewer units.
It is generally seen that most people are investing their money in a lump sum. Lump-sum means your large amount of money or a large part of the money you've saved, which is invested entirely. So, major people have the perception in their minds that if they invest their saved money entirely in investment activities, they will get much better returns in the long run. They're right. One-time large investments for a longer period will provide them with a much higher return when they are withdrawn at their respective maturity periods. Although one could only invest a lump sum of money if he had a good amount of money with him. No one can think of investing in a lump sum in the absence of a fair amount of money. So it's essential that if you're thinking of investing your savings entirely at one go, you should first have a proper money-saving plan, and then you should have a long-term plan.
Who should invest in the lump sum plan?
Those who earn fairly every month and have a fair amount of savings left. Those who have the objective of investing for five years or a long period.
The more time you spend on the investment, the higher the amount accumulated since the power of compounding increases as time passes. Giving your investment more time is wiser than taking undue risks to make an extra 1 % annual return.
With an annual return of 15%, Rs 15 lakh would be worth around Rs 60 lakh at the end of 10 years. Assuming the same annual rate of 15%, your monthly SIP of Rs 8,000 would yield around Rs 22,30,000 at the end of 10 years. However, it all depends on how much money you have in your hand at the moment. If you have Rs 15 lakh to invest, you should ideally park your money in a liquid fund and start a Systematic Transfer Plan (STP) over the next 50 weeks. That's Rs 30,000 per transfer. This method will help you invest all your money and earn cash returns using a reduced balance method. The amount invested through STP should be in a diversified equity fund. You would be fully invested at the end of 50 weeks. If you don't have a lump sum to invest, you should take the SIP route.
The SIP does not reduce investment risk in any way whatsoever. They reduce the risk of irregular income for mutual fund houses and their salesmen. We can only invest if we have the money. If I don't have a lump sum, I don't care about that. If I have a lump sum, then I should ask, "Is there any benefit in spreading that lump sum over a few weeks, months, or years (some would recommend it!), instead of putting it on the market all at once?" There is not much difference between a lump sum and a few weeks or months of investment (STP). Amusingly, this is true in the short or long term!
Use MFs with caution for medium-term (less than 10 years) objectives. Of course, stay away from them for short-term objectives. Just because you've started a SIP, it doesn't mean you're going to achieve your goal. There's a strong enough chance you're not going to and a decent chance you're going to lose money! Choosing an equity-oriented balanced fund for a 5-year investment period is madness.
There seems to be a common perception that those who invest via SIPs are expected to do nothing but invest systematically. Thanks to some "advisors," many investors believe that all one has to do to get "good returns" from equity is to continue the SIP through market ups and downs. Then it will all turn out to be all right in the end. This is an amusingly simple assumption. Then some incorrectly believe that SIP is a method of minimizing market risk, while all it does is buy at random market levels every month. The accumulated corpus via SIP is exposed to all the ups and downs of the market.
There is no such thing as compounding in a mutual fund or a share or anything related to the market. After a while, you buy at the current price and sell at the current price. The selling price may be higher or lower than the purchase price. We use compounding mathematics to understand how much investment has increased (or declined). Apart from that, there is no magic of compounding. Don't take the nonsense of sales guys seriously. If you want to enjoy the power of compounding, get a fixed deposit, a recurrent deposit, a PPF, etc.
I am planning for a 15-year investment and want to hold 60% equity in the initial years. What can I expect during this investment?
If you hold 60 percent of equity, expect the entire portfolio to fall by at least 40-50 percent (not to make it up). It won't be easy for anyone, an expert, or a novice to face.