Dhirendra Kumar talks about why the SIP route of investment is favoured over the lump-sum route
Why do you discourage any lump-sum investment in mutual funds and suggest going for an SIP? Sometimes investors like me will be regretting not entering through the lump-sum investment at a point? Why do advisors discourage making a one-time investment?
Primarily, we discourage investors from following the lump-sum route because there is a risk of entering the market at a high. For example, you have Rs 10 lakh to invest. Now you have the choice of making a lump-sum investment or spreading your investments through an SIP say over the next 10 months. If you are able to call it right, say for instance if you had this money in the month of March and if you invested at the low, and the market goes up, then you will end up making huge gains from your lump-sum investments. But, if you had invested the same amount in January when the market was at a high, then your investments would have gone down in value say by 40 per cent, which would have been extremely disappointing. Hence, it is a very difficult thing to predict whether or not it is a good time to invest a lump sum.
On the other hand, investing regularly with an SIP turns out to be anxiety management for investors. But those investors who are ready to take a call on the market, make lump-sum investments, manage their temperament and not get anxious if the market falls, then, by all means, they can earn high returns through lump-sum investments. But this is a very hard thing to do and hence, it is advisable to invest through an SIP.