Lump Sum vs. Regular Investment: Which Strategy is Better for You?

Fri, 20 Dec 2024

2 mins

Key Takeaways:

• Timing the market is risky; delaying investments often leads to missed opportunities.
• Lump sum investments can yield high returns but come with higher risks during market volatility.
• Staggered investments like SIPs provide discipline and reduce timing risks, with NIFTY 50 SIPs generating an XIRR of ~18% over five years.
• Recent market corrections highlight the benefits of investing during dips and adopting a staggered investment approach.
• Often, investors tend to spend a considerable time predicting market corrections or ‘sit on the fence’ in the anticipation of deep corrections.
• Human nature and Behavioural biases play a significant role in investment decisions.
• Procrastination in investments often leads to missed opportunities as the opportunity cost of not staying invested in the market are high.

• Is now a good time to invest in India?

  We conducted an analysis to highlight why investors should consider a smart way of investing in a staggered manner. Timeframe considered was the Indian General Elections during April to June 2024 period.
  
  Most exit polls predicted a huge win for the incumbent Modi government; however, the actual results didn't meet expectations and markets corrected tracking these developments. On the results day, NIFTY 50 ended lower by 1300+ points (down by 5.93%).   

• Why Market Timing Doesn't Work?

  Investors who delayed their investments amidst the expectations of further correction, ended up losing the  opportunity, as the markets recovered the fall in a matter of just 4 days! Those who invested on the result day or shortly thereafter, benefited in comparison to ‘fence sitters’. 
   

• Case Study: Lump Sum vs Staggered Investments

  Let’s analyze two investors:

  • Investor A: Deployed ₹5,00,000 as a lump sum during the correction.
  • Investor B: Invested ₹5,00,000 in a staggered manner over four months.

  Date of Invst	NIFTY 50	Market  Correction	Investor A	Cumulative Units	Investor B	Cumulative Units
  19-Apr-24	22147		5,00,000	22.57	-2,50,000	11.28
  09-May-24	21957.5	-2%		22.57	-1,00,000	15.84
  04-Jun-24	21884.5	-6%		22.57	-1,25,000	21.55
  05-Aug-24	24055.6	-3%		22.57	-25,000	22.59
  18-Nov-24	23453.8		5,32,056.60	22.57	5,29,904	22.59
  XIRR Returns			10.32%		11.70%

    *The above story is shown for illustration purpose only.

• How SIPs Outperform Over Time:

  Meanwhile, a disciplined way to invest in markets is via Systematic Investment Plans (SIPs). For instance, over the  last 5-years, monthly SIPs in NIFTY 50 Index have generated an XIRR of ~18% v/s Point to Point CAGR returns of  ~15.28% over the same period.
  
  

• Why SIPs Outperform Over Time:

  SIPs enable disciplined investing, which is particularly effective in volatile markets. For instance, a ₹50,000 monthly SIP in a NIFTY 50 Index Fund over five years generated:    
   

  Scheme Name	Nifty 50 Index Fund
  SIP Period	30-10-19 To 30-10-24
  Monthly SIP Invst Amt	50,000
  Total no of Instalments	60
  Total Amount Invested	30,00,000 Rs.
  Valuation As On 30-10-24	46,79,743
  XIRR (%) As On 30-10-24	18.00

       
  *Source: ACE MF
  
  Key Insight: SIPs in the NIFTY 50 outperformed point-to-point returns of ~15.28%, proving their effectiveness in building wealth systematically.  

• Smart Strategies for Current Market Conditions:

  Market corrections provide an excellent opportunity to buy at lower levels and set the stage for higher long-term returns.
  
  

  • Between September 26 and November 21, 2024, NIFTY corrected by 10.93%.
  • A prudent strategy would be to invest ~50% of your corpus during such corrections and deploy the rest in a staggered manner over 3–6 months.

• To bring it to a close

  Whether you’re a seasoned investor or just starting, adopting a disciplined, systematic approach like SIPs can help you navigate market volatility and achieve your financial goals. Begin your journey today with InCred Premier and discover the smart way to invest.