Many new investors get confused in the stock market about the best investment model. Should I invest my money using the lumpsum approach or using the SIP approach? Even though there is no such thing as the “best” investment model, both can be useful in certain scenarios. First, let’s understand the meaning of lumpsum & SIP investment models.
What is lumpsum investment?
Lumpsum investment refers to a bulk investment by the investor. The investment amount is used all at once to invest into stocks. Suppose you received a Diwali bonus in your job of Rs. 1 Lakh & you decide to invest the entire amount in the stock market at one go, this is called lumpsum investment.
What is SIP?
SIP is the short form of Systematic Investment Plan. This investment model refers to continuous investment in the stock market through a fixed amount every week/month (generally SIP refers to monthly investments).
Suppose your monthly salary is Rs. 50,000 per month & you want to invest Rs. 5,000 in the stock market every month, you can use the SIP investment model to build your portfolio.
Advantages of lumpsum investment over SIP
Lumpsum investment is better than SIP because the entire amount which you invest provides a compounded return over a period of time. Suppose you invest Rs. 1 Lakh in the stock market at once, then the returns in the coming years will be the compounded annual returns over the entire capital of Rs. 1 Lakh. On the other hand, suppose you invest Rs. 1 Lakh over a period of 20 months using a monthly SIP of Rs. 5,000. All investments except the first month will miss out on the returns of the previous months. The amount which you invest in the month of April would have missed out on the returns of the previous months!
Lumpsum investment is a good investment model during market crashes or corrections. Typically, there is a stock market crash (fall of more than 25% from the top) every 6-7 years and a correction (fall of 10-15% from the top) every 6 months which provides a good opportunity for lumpsum investment. These fall in stock prices allow a safe investment opportunity in which the investor can comfortably invest their money all at once to get a good return from the market.
Advantages of SIP over lumpsum investment
SIP is generally considered to be a safe choice as compared to lumpsum investment. There is a big risk involved in lumpsum investment because there is no opportunity to invest further even if there is a major market crash. Lumpsum investment doesn’t provide any opportunity to ‘average’ the stocks unlike SIP which is entirely based on the concept of averaging stocks. Suppose you invest Rs. 1 Lakh in the stock market & the market suddenly crashes after the investment, then you take a major loss on the entire investment amount!
SIP investment is a good investment model during an uptrend or a sideways market. It reduces the risk which the investor takes and also allows some cash in hand which the investor can use to invest in case of a stock market crash. Another advantage which applies to some people who have a habit of splurging their money is that the SIP model forces such people to invest in the market because it can be very easily automated.
Is there any investment model other than lumpsum & SIP?
Yes, there is! Both lumpsum and SIP strategies are popularized in the financial world because they are extremely easy to execute. Lumpsum investment is simply purchasing stocks using your entire capital and SIP can easily be automated to ensure regular investments. However, that’s not how the biggest investors in the stock market invest their capital!
A smart investor invests his/her capital only when there is a good opportunity in the stock market. Market crashes, price-wise corrections, side-wise corrections provide a good opportunity for an investor to invest in the stock market to get good returns. A smart investor capitalizes on such opportunities which can neither be done using the lumpsum or SIP investment model. The clear message is to buy stocks only when there is a good opportunity! To learn more about this, visit the article – What is the best time to buy a stock?
Conclusion
Both lumpsum and SIP investment models have their advantages and disadvantages. However, the best strategy is to buy stocks when there is a great opportunity such as a market crash or correction. Such an investment model requires an investor to conduct their own study & decide for themselves to find the opportune moment. The final decision of the investment model which the reader wants to use depends entirely on the reader!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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Very useful info for investors 👍
Thanks Renishji 😊