When investing in mutual funds, you can either opt for the Systematic Investment Plan (SIP) route or make a lumpsum investment. Each has its own benefits – not having to time the market is one of the biggest benefits of SIP mutual fund investments. When it comes to lumpsum plans, however, it’s of utmost importance to understand marketing timing and conditions. Why is that? Let’s find out.
The importance of market conditions and timing in lumpsum plans
When you invest through an SIP, you are investing small amounts in a fund of your choice in regular intervals over a period of time. This is beneficial because it applies the concept of rupee-cost averaging, where the number of mutual fund units that are bought are automatically adjusted based on the price, averaging the total cost of investment over time. This benefit is not available in lumpsum plans.
In a lumpsum plan, you are making an investment at one go in a mutual fund of your choice and are usually investing a considerable amount. Hence, the market condition, primarily the market price of the units, is of great significance. One of the basic rules of investing is to buy low and sell high. Hence, when making lumpsum investments, you have to make sure that you don’t end up investing in a fund at a time when the prices are high, with not much potential to go higher over time.
It’s important to invest in a way that you can set your portfolio up for capital gains over time. Investing in a mutual fund when there is a sharp correction in the market can be beneficial as in the long term the market is bound to recover. And when the prices climb back up, you can sell at a price higher than what you bought it at making profits.
What to keep in mind about market conditions when investing in lumpsum plans?
Nobody can perfectly time the market – not even the most experienced or legendary investors. That’s because the market forces of demand and supply that influence the price of the underlying stocks and other securities in a mutual fund are influenced by a range of macro and micro-economic factors.
As per the technical definition, a stock market correction is when the price has fallen by 10% or more. A bear market is when the market decline is 20% or more from its previous peak. But since nobody can ever predict the extent of a market correction, you can also have a number in mind for yourself for when you want to invest in mutual fund lumpsum plans, say 5% or 15%.
Also, for the sake of diversification and risk management, it is advisable to invest in both SIP and lumpsum plans when investing in mutual funds instead of picking only one route. You should also consider your risk appetite and investment horizon, in addition to market conditions, when investing in a lumpsum plan.