Case Study: SIP Investment Or Lumpsum Investment?
SIP Investment or Lumpsum Investment?
The concept of SIP and Lumpsum are the two modes of investment strategy that is followed by investors in the capital markets. SIP investments are maintained in a disciplined form in investment strategy where client is providing money according to the stipulated plan or contract. Lumpsum investment is followed by investing the entire amount into a chosen equity stocks or plan. Lumpsum investing strategy is mostly followed by the experienced investors those have the better understanding of the market and exposed to the current valuations of the stocks and can evaluate market behaviour.
SIP or Systematic Investment Plan is a type of recurring investment where investor puts a fixed …show more content…
For long term wealth creation, and to invest the excess corpus for extra wealth gain, novice investors follow up a disciplined approach for long time horizon beating the market fluctuations.
Lump Sum Investment
Lump sum investment is investing a certain bulk amount into the market at a time. Experienced investors who can understand the market frictional forces and value of the stocks can make the investment in the potential rising market to gain high corpus on wealth. Lumpsum investing has an element called market timing. Market timing is very crucial in lumsum, as huge wealth is being associated with the market, moreover investor who can hold the breadth even at depression market can take up the leverage to invest in the lumpsum mode of investment.
Getting down to the basic calculation
For example in case of SIP, an investor place a request to buy 100 shares or invest Rs.10000 in a specific company or share on the 7th of every month. Choices can be either quantity or amount based. If the current price of the share is Rs.100, then the investor gets 100 shares in return, but if the market goes down at share price at Rs.50, the investor lands up at accumulating 200 shares of that company. This is the power of rupee cost averaging which continues over the month and the entire time …show more content…
It just ensures that the investor’s money is well spreaded in equity funds over the period of time at different market levels. The reason is investor doesn’t make big losses at market crash.
Equity markets are never steady, it always move up and down for a long spell. So only lucky investor bet the market with heavy lumpsum at the market lows and exit at the market highs and gets the maximum returns. But if unlucky, many investor land up in the block hole losing their money investing at the wrong time.
To avoid such regrets, SIP is invented. By spreading the investment over many months and at various Sensex levels, investment firms and researchers ensure that the money don’t go down at particular fall. But SIP can’t help if the market declines steadily after investments. It is because SIP makes small denominated investments and spread them throughout the time, simply averaging the investment and returns. If stocks are purchased at bear phase of the market, the investment will show up loss.
In Indian markets, over the last five years SIP has significantly performed consistently on five year funds rather than shorter periods like one or two