There are several ways to participate in the market. Some prefer big bang entry while some prefer staggered entry into the market. Both have their own advantages and disadvantages. In investment terminology, big bang (usually) known as Lump Sum investment and staggered is known as Systematic Investment.
First, let’s catch the low hanging fruit. Let’s discuss what’s Lump Sum investment.
Lump Sum Investment
Lump Sum investment is also known as the one-time investment, based on situation or availability of money. Typically Lump Sum investment approach suits to people who want to time their investment according to market situations OR don’t have steady stream of income. For example, I usually keep some money aside to take advantage of market volatility, and as and when I see the opportunity like Brexit OR China currency devalue, when the market crashes momentarily as a reaction to such news I quickly deploy money as additional lump sum investment to my existing investments. Certainly, it is a good strategy but it comes with big risk and requires skills to analyze market conditions and take actions accordingly in time. Not all people have time and/or skills to analyze such situations hence I suggest novice people to stick with the systematic plan, discussed next.
Systematic investment plan a.k.a SIP is very popular investment process. In this approach, we will define a weekly/monthly/quarterly schedule to investment in the market. The money will be deducted from savings account on the defined date on defined schedule and invested in defined funds. Systematic investment approach suits people having regular stream of income with surplus money available every month OR do not have time and/or skills to time market. There are several advantages of such approach. First and for the most, it creates consistent savings behavior. You will develop a habit of keeping money aside for SIP transactions. Secondly, it takes bias out of equations. You will invest irrespective of whether market moves in your favor or against. Your unit price will be always averaged towards the lower side. You will buy more units when the market is down and fewer units when the market is up, so ultimately it will bring down the average cost of units and giving you more profits.
Systematic Investment arguably could give higher returns compared to Lump Sum Investment.
While systematic investment could be registered with perpetual time, but it is recommended to have defined end date for systematic investment approach so that we could analyze the fund’s performance and increase / decrease investment amount or withdraw money all together at the end of SIP duration.
As I discussed above, there is no clear winner out of these two approaches. Both have different advantages, and it can certainly help give you a boost to your returns.
So choose wisely, and enjoy wealth creation process.
Here is a motivating video on SIP investment from IDFC. Check it out.
Also published on Medium.