Lumpsum investments are easy to do if you know what you feel about it, not how markets move.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” - Peter Lynch

📚 Table of Contents

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• SIP or Lumpsum
• A technique for making lump sum investments
  • Step 1: Minimize regret for losses
  • Step 2: Make the number of investments to be chosen by chance
• Where to invest the lumpsum

SIP or Lumpsum

A typical version of this question is which is better:

• SIP every month
• wait for the market to “fall” and then invest a lump sum

There is enough evidence that timing the market is very hard for the average retail investor. Therefore investing every month (or as per money received as income) will be perfectly fine for most people. Since most investors earn salaries monthly, it makes sense for them to match the frequency of income with their investments, so SIP exists. There is nothing special about SIP. This post shows that only starting a SIP will not lead to meeting a goal.

This post deals with a different version of the same problem:

• if you have a large amount of money today (say a bonus, inheritance, real estate sale or gift), then how to invest
• if you are starting an investment for the first time and have a large amount of money in FD to be invested
• just exited a large holding in a fund or a stock and need to invest that money
• want to switch from a regular fund plan to a direct plan

A fairly common question among investors is that “I have x lakhs of rupees” - how do I invest it in equity markets (and their fears with each option)

• at one go: what if the market falls immediately afterward
• break it into parts: what if the market starts rising immediately afterward

There is a lot of research that shows there is little impact of short-term market movement on the long-term performance of the portfolio. Timing the market is difficult to achieve for many people. Also, waiting for the right moment to invest is risky since markets may move suddenly, leading to many regrets.

Another thing to keep in mind is that once your portfolio grows, the impact of a single investment (either lumpsum or SIP) will gradually reduce with time. A portfolio allocated as 60:40 equity to debt allocation may easily move more than 1% on most of the days in a month. You can this way easily invest 1% of the portfolio value in a week and not think too much of it.

A technique for making lump sum investments

Via one simple plan, we will

• minimize the regret of losses (loss aversion)
• Reduce the number of active decisions that the investor has to make to ensure things are left to chance and not blame themselves later

Step 1: Minimize regret for losses

• Take the amount to be invested and divide it into “n” equal parts
• Invest each part manually every month (use a calendar alert) or set up a standing instruction in a platform like MFUtilities

Step 2: Make the number of investments to be chosen by chance

Throw a (fair) die to find “n” - the number of investments you are making. Use a real dice or there are many online.

If you do not like the first result, you can always do a best of three.

So, if ten lakhs is the investment amount and “n” comes to 4 as per the dice, then for the next four months, invest 2.5 lakhs each month.

Where to invest the lumpsum

This will be as per

• identified goals
• suitable asset allocation
• and followed by a plan for review/rebalancing

The full process is explained in this detailed post and here: How to invest a lump sum amount for your goals?.

But before deploying this lumpsum, first, check if you are ready to start investments.