Within one and a half years, the market saw a spectacular return. By November 2021, the Nifty 50 moved into a consolidation phase.
Indian market 18 months sprint without any major corrections, ended recently and began the stage of a downward spiral in October. From then on, the market saw signs of consolidation and is 6% down from its peak.
Since this trend, many who were not part of the early rally started to think about entering the market aggressively. Most of them are under FOMO. As a result, some even consider making an entry through lump sum investment.
But is lump sum investment a good idea?
Nifty hit an all-time high of 18,604 in October 2021, then moved to a corrective phase and hit a low of 16,410 in December 2021. On January 18, it tried to breach its all-time high but failed to penetrate and continued its way down.
Even though the budget lifted it, the Ukraine crisis, earnings season, Budget contours, inflation and various other factors made the market movement directionless and is down by 6% from recent lows.
Other leading indicators such as PE and PB show that the stock market is neutral, and the near-term direction is not clear.
Lump sum investing is for those who can recognise market cycles and identify a market low. They will invest a lump sum amount either directly into equity or an equity-oriented mutual fund at the right time and will get higher returns.
This technique is based on the basic principle of investing, buying low and selling high. It provides considerable returns for those investors with a long-term investment horizon of five to seven years. It is often used to achieve specific financial goals like retirement.
Even though it requires a one-time but significant cash outflow, an ill-timed investment could result in huge losses and loss of confidence in the market. After all, investing a huge amount in the market in one go will create anxiety in the investor.
If that investment loses value, then he would be hesitant to pump in money again.
The alternative for this can be a systematic investment plan (SIP). Both allow investors to benefit from potential wealth creation in the long run. The major difference between the two lies in the frequency of investment.
SIPs allow investors to pump money into a mutual fund scheme periodically. It could be daily, weekly, monthly, quarterly, half-yearly, etc.
Anyone can invest via SIPs with as low as ₹500 per month, but an investor only with significant cash outflow can do lump sum investment.
Anyone who knows the pulse of the market and has a lump sum amount can go ahead with lump sum investments as it would yield better results. But for the others, SIP is the best option and it will also inculcate a sense of discipline.
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