Systematic Investment Plan (SIP) is being touted as that wonder drug that would solve all your financial troubles. Fund managers, advisors, markets experts all of them suggest retail investors to invest through SIPs. And why not? It suits most investors’ requirements. You are shielded from volatility, can invest with as low as Rs 100 and build a sizeable corpus over a long-term period.
But with all its benefits, is SIP suitable for all situations and for all investors? We think when it comes to investments every product has to be customised according to your goals. So sometimes it might be sensible to drop SIPs and go for lump sum investments.
Lump sum investments, in equity markets, can be tricky. If the markets are down and you need to redeem the investments, you may end up booking losses. But as the saying goes high risk = high rewards. If a scheme delivers 10% returns per annum and you invest Rs 10,000 per month in it through SIP route for 10 years, the total investment amount would be Rs 12 lakh and value of your SIP would have become ~Rs20 lakh. Whereas if you invest Rs 12 lakh lump sum in the same scheme for 10 years, the value of your investments would become ~Rs 31 lakh.
But how could you have your cake and eat it too?
There are three scenarios where not doing SIP would benefit you,
Long Term Investment: If you have a lump sum that needs to be invested and you are a long-term investor having investment tenure above 5 yers. Then it makes more sense to invest the entire amount in one go. You may divide the amount and invest in two to three schemes having different risk profiles like Large Cap schemes, Mid-Small Cap schemes and any other debt scheme for downside protection. This way, your investment will yield you higher returns.
ELSS Investments: ELSS i.e. Equity Linked Saving Schemes or tax saving funds are quite popular among investors as they provide high equity returns as well as income tax exemptions. They have a lock in period of three years. Therefore, monthly SIP will not give you a good investment experience as every SIP will be locked in for three years. Investing lump sum will be ideal in this case. If you are wary of doing so, as the tenure is only three years, you may invest over a span of four to six month rather than investing throughout the year.
Portfolio Hedging: Hedging essentially means taking risk through one scheme and protecting it with another scheme. We believe doing lump sum investments in products like Fixed Maturity Plans (FMPs), most preferred by institutional investors, would provide a much-needed cushion for your portfolio. FMPs feature low on interest rate risk and depending upon the asset allocation they may feature low on credit risk as well. These are very similar to FDs as investment over three year also provide indexation benefits. So rather than keeping your money in FDs switching to FMPs for hedging would deliver enhanced returns.
While we are advocating lump sum investments in above scenarios, we are nowhere discouraging SIPs. We think everyone must choose a facility or product according to their goals and requirements. Blindly starting SIPs in numerous schemes may not yield optimum returns. As legendary investor Warren Buffett said: “Do not put all your eggs in one basket.”