In times of sharp fluctuations in the stock market, the biggest question before investors is whether lumpsum investment is better or SIP strategy of investing small amount every month? Both methods have their own benefits and risks, but their impact is different in volatile markets.
Why is SIP considered safe?
In Systematic Investment Plan (SIP) the investor invests a fixed amount every month. Its biggest advantage is rupee cost averaging. That means, when the market falls, you get more units for the same amount, and when the market rises, you get less units. In the long run this balances the average purchase price. For example, suppose an investor wants to invest Rs 1.2 lakh in a year. If he invests Rs 10,000 every month through SIP and the market ever falls by 10%, he will get more units. If the market recovers and gives 12% returns at the end of the year, then the SIP investor can get a better entry price on average.
When is lumpsum better?
On the other hand, if the market is already at a low level and there is potential for further upside, a lump sum investment may be more profitable. Suppose the market has fallen 15% and then there is a steady recovery. In such a situation, Lumpsum invested in the beginning takes advantage of the entire rebound, whereas in SIP, the money is invested slowly and the full benefit of the initial boom is not available. For example, suppose an investor invested ₹1 lakh lump sum during a market downturn and the market rose 20% in the next 12 months, his investment would be worth ₹1.2 lakh.
Who is better in volatile market?
According to experts, if the market direction is unclear and volatility is high, then SIP helps in spreading the risk. At the same time, if there are signs of strong recovery after a big fall in the market, then Lumpsum can give more profit.
Latest Business News