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Investing in Your 40s and 50s: Why Lump Sum Beats SIP for Mature Investors?

Posted on 13 Oct 2024
Author: Sayan Sircar

Tags: Behaviour ; Mutual Funds

10 mins read
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This article explains why seasoned investors with established careers and clear financial goals should consider a more dynamic approach over blindly running SIPs.

Investing in Your 40s and 50s: Why Lump Sum Beats SIP for Mature Investors?

📚 Topics covered:

Defining SIP, SWP and STP
Why should you invest only as a lump sum once you cross your 30s?
How does the mature investor differ from the younger investors?
What are the three negatives of having a SIP as an investor?
Three actionable steps for mutual fund investment that 40-plus investors must follow
How to choose which funds to invest as per the above plan?
What are the benefits of following the approach described above?

Defining SIP, SWP and STP

SIP SWP and STP

All of these are standing instructions that get executed as per a schedule you specify:

Systematic Investment Plan (SIP): Money from a bank account is invested into a mutual fund, typically once a month
Systematic Transfer Plan (SIP): Units from a mutual fund are redeemed to invest in another mutual fund of the same AMC
Systematic Withdrawal Plan (SWP): This is the reverse of the SIP. You sell the units from a mutual fund to send money to a bank account

Note: You don’t invest in a SIP; you invest via one since a SIP is a standing instruction. You invest in a mutual fund, or basket of stocks, via a SIP.

Why should you invest only as a lump sum once you cross your 30s?

There is enough content on both print and social media that implies that all you need to do is start a Systematic investment plan (SIP) in mutual funds. You will be, as per Edward Moore, “rich beyond the dreams of avarice” after 30-40-50 years with 10-20-50 crores.

The narrative of “SIP creates wealth” is so strong that many people believe that SIP itself is a form of investment and not a simple standing instruction from your bank account to purchase a fixed amount of mutual funds regularly.

In this article, we will turn this narrative around and explain how mature investors, those who have reached a certain level in their career and wealth will be better off investing a variable amount manually every month instead of a blind SIP.

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How does the mature investor differ from the younger investors?

There are three characteristics which an investor in their 40s and 50s that distinguish them from those who are younger:

clarity on both work location and overall career progress
they are serious about the need to invest for retirement
they have a good idea of the future requirements and goals for their children

If nothing else, these investors are extremely busy with family and career-related pursuits. Unlike their younger selves, they do not have the time and inclination to follow social media and financial influencers to find the best mutual funds and stocks.

So why should these investors not invest in SIP form?

What are the three negatives of having a SIP as an investor?

There are three reasons why the Asset Management Company (AMC) and mutual fund distributors pitch investing in SIP form:

The investment happens on autopilot without the naive investor making changes to it
The Assets under Management of the MFD and AMC increases without the risk of stopping
The monthly SIP deduction aligns perfectly with the fact that most investors get paid once a month from salary

SIP is hands-off by design

A SIP is by default a set-it-forget-it type of investment mode. If you think back about your SIP, when someone asks how you are investing, you will give a response like “Something is happening” or “my advisor is investing, they are doing something”.

This attitude of your money doing “something”, which you are earning after 15+ years of education and 20+ years of working is a disservice to your past, present and future selves.

SIP gives a false sense of surety

A SIP supports the mentality of investors that all you need to do is start a SIP. Once you do that somehow, as long as you are investing in 10-15 best mutual funds, wealth will be automatically created.

SIP creates avoidable confusion

Over time three things happen that impact your investments that are happening via SIP:

your SIP gets over since you had set up a 12 or 24-month mandate
your income increases due to salary hikes and your monthly investible surplus increase
you get bonuses (or a one-time inheritance) that need to be invested

These events lead to confusion since the investor now wonders where the new amount should be invested:

Should they invest in the same funds that they have? If yes, in which proportion?
Should they invest in new funds since their existing funds are not performing? If yes, which are these new funds?
If a substantial sum is to be invested, should they invest that at one go or break it over a few months?

The framework that we propose below will get rid of this confusion once and for and will allow you better control over the amounts you are investing.

Also read
What do you need to make money when the stock market suddenly drops like 4th June 2024?

Three actionable steps for mutual fund investment that 40-plus investors must follow

Step 1: Choose a fixed investment date

Here we suggest using the weekend after your salary credit date. For those being paid at the beginning of the month, this will be the first weekend of the month. For the rest, it will be the last weekend of the month. At any rate, this weekend is fixed since your salary date is fixed.

We suggest not using any other date since if you are too far from your salary credit date, it will create confusion on the amount to be invested due to uncertainties in expenses over the rest of the month.

Step 2: Choose the amount of investment

How much to invest a month is a question that creates confusion forever. For most people, the answer will be “every rupee that you can spare” unless their financial plan shows them that they are ahead of their major financial goals like financial freedom.

Our answer to this conundrum is simple:

Invest the money that is there in the salary account just before the salary gets credited.

Let us break this down:

we are assuming that the incoming salary is enough for the next month’s expenses and EMIs if any. If not, and if there is a big payment due like a five-year road tax payment, then use your sinking fund
the amount that was left in the salary account is an excess that can now be safely invested without impacting next month’s budget
this left-behind amount will fluctuate month on month and will automatically adjust for salary hikes, bonuses and excess spending on any particular month

Step 3: Execute the investment

You can log in to a portal like Mfcentral.com and invest in your choice of funds. Since you are doing this exercise manually, the propensity to invest in multiple funds which just create clutter will be less.

How to choose which funds to invest as per the above plan?

A lot of investors might get stuck at this point. The answer is simple:

You will invest in a single fund every month
The investment will go into the correct risk/horizon bucket

We explain this concept below:

We need a method to divide your entire portfolio into these 12 categories (3 buckets: equity/debt/cash and 4 time-based groups) and allocate the correct amount of mutual funds to each.

Bucket Wise Mutual Fund Categories

The Arthgyaan goal-based investing calculator shows you how to do this by making it easy to see how much of your existing portfolio should go into each bucket and year-based cell as shown in the image above. The detailed concept is explained here: Which are the Best Mutual Fund Categories for every Investment Horizon?

We will use Google sheets to create a simple calculator for this calculation. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

This table is in the “goals” tab on the right.

Your investment this month will be in the bucket that does not have enough already invested in it.

This whole process will take no more than 10 minutes every month once you have set up the tool and linked your Mfcentral profile with a mandate to deduct your bank account automatically. Of course, you can pay for every investment via Netbanking as well.

What are the benefits of following the approach described above?

Irrespective of the background, market experience and portfolio size of the investor, following this approach gives you peace of mind since:

the plan automatically adjusts for your unique financial goals and current status of the portfolio
you are never confused about what to do next since the sheet will give you the next step to take
you are always sure that every rupee of investment is working towards its own allocated goal to ensure that your financial future is taken care of

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