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Sips Vs. Lump Sum Investments
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We have spoken quite a bit about Systematic Investments and the importance of making regular investments – in whatever instrument or security you are putting your money. You would have a natural curiosity as to whether SIPs are better than investing a lump sum amount at one go. It is rather difficult to say whether one is better than the other. However, Systematic Investments have several advantages compared to a lump sum investment.
Let me try to explain with an example.
At the height of the global financial crisis at the end of 2008 and towards the beginning of 2009, auto stocks in India were languishing having been beaten down due to poor demand for automobiles. However, by the end of the year, due to various stimulus packages from the government, there was a revival in demand and most auto stocks had risen 2.5 times to 3 times of the prices they were at the start of the year.
Now suppose you were a fairly affluent person and had about 20 lakhs with you lying in the bank. If you had invested that money in some of the frontline auto stocks at the beginning of 2009, you would have made a lot of money in a year.
In this case, investment of a lump sum amount would have certainly been a sound idea because you would have bought shares when the prices were low and sold them when they were high.
But, the snag is, how many of us would have about Rs 20 lakhs free cash lying in the bank ready to be invested? Most middle class families have very little cash remaining at the end of the month for investments and money is usually tied up in some form or the other. Also, you have to be sure when making a single investment in the equities market, that you catch the low point in the market – that is, you buy the shares when they are low. This is possible only when you are monitoring the market closely. If you buy stocks when the market is on a high, your chances of appreciation are limited.
Investing a lump sum amount in the debt market would make a lot of sense since debt securities such as fixed deposits give you fixed guaranteed returns and there is no question of timing your investments.
Now let us turn to the advantages of systematic investments. As we said earlier, we may not have a large amount of ready cash available with us for investments. So, the next best thing is to invest small amounts. You may not have 50,000 readily available with you now, but you can invest Rs 4200 every month for a year.
With systematic investments, you do not have to worry about timing the market for low prices. Since you are investing over a long period of time, you get the advantage of low prices since markets are going up and down all the time. For example, Indian markets were in the grip of a bear phase during the years 2011, 2012 and 2013. If you had made regular investments in those years (at low prices), you would now be benefiting from the market surge we are witnessing.
Investor psychology being what it is, they usually buy when the market is high and sell when the market turns bearish, when actually they should be doing the opposite. When you invest regularly this particular problem does not exist because you are investing at all times, whether the market is high or low. So your average cost of acquisition is evened out.
The second advantage of Systematic Investments – and this is very important – is that it inculcates the practise of disciplined and regular investing. It becomes a habit and part of your monthly or weekly outgo.
We have to stress here that systematic investments work best when it is done over a long period of time, otherwise you can take your chances with a one-time, lump sum investment.
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