Systematic investment reduces the risk of timing the market
Investing systematically allows an investor to spread out her investments over a period of time
How does one decide whether they should invest via systematic investment plans (SIPs) or through a lump sum, considering they have the wherewithal to invest a lump sum amount?
—Kaushal
People who invest in mutual funds (MFs) instead of directly in the stock market are doing so primarily because they want the reduced risk that funds offer with diversification of holdings. The choice between systematic investment and lump sum investment is similar. Investing systematically allows an investor to spread out her investments over a period of time, thus, reducing the risk of getting the market timing wrong. Such MF investors, who have avoided direct stock investing to reduce risk, find systematic investing a natural fit as far as mode of investing is concerned.
So, the question that you need to ask yourself is: now that you have chosen the reduced risk of investing in the markets not directly but through MFs, would you like to reduce the risk further by spreading out the timing of your investments? If the answer is yes, you should invest in a handful of liquid funds and move them systematically (using systematic transfer plans) to market-exposed funds. However, if you are comfortable with some amount of market timing risk (especially if your time frame of investing is long term), you could choose to go with lump sum investing.
I am a 35-year-old divorcee with no children. I have received 25 lakh as alimony from my husband. I plan to use most of this amount to buy a flat in Mumbai within the next 2-3 years. Where should I invest the amount? I plan to invest about 1 lakh in MFs currently, with a time horizon of 2-3 years.
—Kalyani Nambiar
Since you have a specific goal and a time frame for the alimony amount investment, it would be prudent to ensure that the investment gets the best post-tax return in the safest manner possible. It would be wise to invest it in relatively safe schemes such as in the short-term debt fund category. You can divide the amount into equal parts and invest in Templeton India Short Term Income Plan, UTI Short Term Income Fund, PineBridge India Short Term Standard Fund and SBI Short Horizon Debt Fund Short Term Fund. There is a good chance that you will get a better post-tax return from these investments than from fixed deposits over a 2-3 year time frame.
You plan to invest another smaller sum of money for the same duration as well. However, the fact that you mention it separately, suggests that it is not tied to a specific objective. If that is the case, and if you can take a bit of risk with that portion of your investment, please consider investing a part of this money in a good diversified fund. You could invest about 25,000 in this fund and the remaining in a short-term debt fund as mentioned above.
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