SIP is a way to invest in mutual funds wherein a certain amount of money is invested at a regular interval. The frequency of investment could be daily, weekly, monthly or quarterly. Mostly, investors opt for monthly investment.
Lumpsum is investing the money at one go wherein there is no prior interval or frequency defined for investment.
While SIP is an ideal approach to generate wealth, sometime investors might be willing to invest large amount at one go, due to incentive received in case investor is a salaried person, or some additional benefit in case investor is self employed person, or someway in which investor has received additional money to be invested.
But should the investment of large amount be done at any point without analyzing the valuations of the market?
To understand this, let’s take an example wherein investor A invests ₹ 10 Lakhs in a mutual fund scheme, and the market falls by 20% in the next one week. The market value of the investment will immediately reduce by large amount, and the investor might panic.
Let’s take another scenario, the investor started with 1 lakh lumpsum investment on 1st day, and kept on investing 1 lakh everyday after each market fall. The investor takes benefit of market fall in this case and gains a lot when market rises.
But 20% market fall does not usually happen, and it is very difficult or almost impossible even for experts to anticipate each market fall.
In case investor wants to opt for lumpsum investment, he/she should look into the market valuations. If the market is undervalued or fairly valued, it’s ok to invest lumpsum but not in one instalment, probably in 4-5 instalments spread over a small time period to take advantage in case there is market fall.
Valuation is a subjective topic and how does the investor decide if the market is undervalued, fairly valued or overvalued?
To answer this question:
- In case of large cap funds, if the PE of Nifty 50 and Nifty Next 50 is in between 20 to 25, it can be considered fairly valued. PE below 20 needs to be considered as undervalued. PE above 25 means the category is overvalued.
- In case of small and mid cap funds, if the PE of Nifty midcap 150 and Nifty smallcap 250 is in between 20 to 30, it can be considered fairly valued. PE below 20 needs to be considered as undervalued. PE above 30 means the category is overvalued.
To check on the PE of indices mentioned above, please refer to below link:
https://www.niftyindices.com/reports/historical-data
How to invest lumpsum when the market is overvalued?
Even if the market is overvalued, no one knows when it is going to correct, or if at all there is going to be a crash. In this case, the ideal approach would be to invest the money in a debt fund (probably a liquid fund or a ultra short term fund), and then do STP ( Systematic Transfer Plan) from debt fund to equity fund on weekly or monthly basis. STP is allowed only within the same AMC. So, investor needs to invest in debt fund of the AMC whose equity fund he/she has opted for investment.
In case there is a market crash during the period STP is active, investor can stop the STP and withdraw the entire amount from debt fund to invest in equity fund.
So, to conclude both SIP and Lumpsum investment have their own advantages, with SIP being the ideal approach in any market situation, and lumpsum providing additonal gain in case the market is undervalued.