Investing a lump sum in equities will not benefit you much since a lump sum of your income will be locked in those assets which might have performed well during your initial fund selection period. But volatile markets cannot guarantee anything. If the particular fund in which you have invested a major portion of your savings into starts to underperform continuously for 2-3 quarters, your returns are bound to be zeroed down or may even become negative. Borrowing personal loans, home loans etc to fulfill your financial requirements, may not be very likeable since this high inflation period may hamper your financial position.
Systematic Investment Plan (SIP) will help you avert any such credit risk since with this tool you are in a position where it is viable for you to monitor your fund’s performance from time to time. This can benefit you since you invest in a fund, in a particular number of installments specifically, on a monthly basis. Then you move on to deciding your level of savings after you have set aside finances for providing for your insurance policies and for your emergency fund needs. Be choosy in your fund selection. Make sure that you do not have excess number of equity mutual funds. In fact, you can benefit yourself much more just by investing in a minimum of 3 funds which have been consistently performing well over a period of time. Make sure that you build a well diversified and a balanced portfolio in the beginning since this can be a good start. Opting for large-cap-oriented, multi-cap funds, small- and mid-cap funds can be a good call.
Investing at least 50% of your funds into equities in the asset classes mentioned above, will ensure you robust returns over a period of time. For this to happen, you are required to be patient. It is important to remember that, investing in markets guarantees some amount of volatility since the decisions of all the decision makers namely, the investors, business men, government policy makers etc do not always align with each other. And this is bound to affect your returns. Since investment in equities is based on long term tenors, certain market irregularities are corrected over a period of time. Therefore, it is important to stay put and wait till the markets even out. Moving out of funds and entering into new assets will only increase your expenses since it would mean that you have purchased your shares when the prices were high and sold when they were low. Thereby, it reduces the overall returns that your fund earns. Apart from these, entering and exiting funds can make you miss out on a couple of good market days which could have benefitted your returns to quite a good extent.
When the markets are under performing it is not a good time to either exit your funds or to stop your Systematic Investment Plan (SIP). SIPs helps in both market cycles- during booms as well as during crashes. Mainly because, considering your fund selection, a balanced portfolio will ensure that at the end of the day, your returns may turn out to be more than your investment on that particular day. Therefore it is advisable to stay put and not deviate from your goal of saving.
Remember, the goal of investing in SIPs is to ensure that your portfolio enjoys the required risk profile as accepted by you along with a good diversification across asset classes. It is important to note that the diversification is very crucial if you want to earn maximum benefit from your investments. It is better to have more than one fund but less than 5 mutual funds, but the key to achieve profitability is the performance of each fund. Investing in SIPs gives you the advantage of prompting you to invest systematically. Ensure that you stay put and make prudent investment decisions.