The decision to go with an SIP or a lump sum has a lot more to do with your financial goals and your cash flow scenario rather than the current market condition.
Nifty50 and Sensex 30, two leading stock market indicators are down by almost 500 points and 1000 points respectively from their highs. Sensex touched the all-time-high of 62,245.43 intra-day and closed at 61,716.05 on October 19, 2021. On October 21, BSE Sensex 30 was trading at around 60651 levels, down by over 1000 from highs. The NAVs of most equity mutual funds are also at lower levels over the past few days. While the corrections and dips in the market were never ruled out, the trend in the days and weeks ahead are still not known. What is known is that the equity market does not travel in a linear manner and there will be periods of ups and down in the market. For a long-term investor, such dips help to enter the market at lower levels to reap the benefit over a longer time horizon.
Long-term investors keep looking for such opportunities and besides avoiding to ‘time the market’, they either make lump sum investments or add fresh funds to their existing mutual fund folios. Buy low and sell high is the only principle that works well when one gives time to the investment portfolio.
In the current market scenario, where the market is tumbling almost on a daily basis, should one consider investing a lump sum now or start a new Systematic Investment Plan (STP)? Remember, whatever you do should be in line with your asset allocation plan and not based on market conditions at any point of time.
“The decision to go with an SIP or a lump sum has a lot more to do with your financial goals and your cash flow scenario rather than the current market condition. If you are regularly rebalancing to your defined asset allocation, then the decision to choose between an SIP or a lump has a lot more to do with your cash flows because predicting which asset class will outperform is very difficult ahead of time,” says Rishad Manekia, Founder and MD, Kairos Capital.
The equity as an equity asset class is volatile and suits long term goals. If you have ongoing SIP’s, it’s always suggested to continue. “If an investor is getting a salary, then they might find SIPs an easier option to regularly invest in their defined allocation. However, someone who has got a bonus or suddenly a larger chunk of money to invest might find investing via lump sum in their defined asset allocation which might work better for them” adds Manekia.
What is equally important especially at these times is to ensure you have an asset allocation mix. Gold, debt, real estate along with equities should form the overall portfolio and allocation into them should be done as per your risk profile and goals to be achieved. Manekia suggests, “If you have a well defined financial goal, then that would define the risk-return profile of the portfolio you should invest in. Asset allocation is key here because for short term goals there will have more allocation to lower risk asset classes whilst longer time horizons can allow for more risk taking if the investor is comfortable with the volatility.”
For those who may not be comfortable with the ongoing volatility, the Systematic Transfer Plan(STP) approach could help in allocating funds into the equity market. “STPs are for those who want to take a tactical call on an asset class or scheme by systematically buying into or selling out of a scheme via switching a defined amount from one scheme to another at regular intervals,” says Manekia. Under STP, you invest a lump sum in a liquid or other debt fund and then provide the mandate to the fund house to keep diverting a fixed amount on a regular basis into equity funds of the same fund house.
Whether it is a lump sum investment or SIP, if your aim is to save for long term goals, the stock market corrections may be used as an opportunity to add more to your equity portfolio. What is also required is a proper diversification across MF schemes keeping market capitalization and sectors into consideration. Also, it could be the time to revisit your portfolio and review the performance of schemes to take corrective action, if required.