I have Rs 10 lakh that I plan to invest in equity mutual funds. My investment time frame is 5-8 years. Should I invest it as a lump sum or should I opt for the SIP route, spread over 5 years? Some investment advisers tell me that as the present Sensex PE is relatively low, I can opt for lump sum investment.
Timing equity markets based on low Sensex PE is not right. You can never predict the right time to invest in the markets. By design, SIPs are supposed to be simple and straight-forward. You invest a fixed sum regularly in an equity fund, regardless of market conditions. Over a long-term, you end up buying more units when the markets are down and fewer when the markets are up.
Instead of trying to time your investments, you should regularly invest a fixed amount. The regular investing habit helps you gain from averaging and the power of compounding. It is not the market timing but time in the market that matters with SIP which makes the power of compounding to turn things in your favour. The cumulative effect of starting early, being regular and power of compounding help you build wealth. So, at one level, SIPs are nothing more than a psychological trick to make you invest when the market is low.
We suggest you invest the lump sum into 3-4 short-term funds and initiate a systematic transfer plan (STP) in 3-4 equity funds from the large- and mid-cap category by using the fund select feature on our website. With this approach you can spread your investments over the next 1-2 years instead of the entire 5-year time frame. The biggest advantage of SIPs is that they help you manage anxiety.