Select Page

Let’s talk onions – Part 4 – SIP or Lumpsum?

by | Jul 28, 2019 | Finance, Mutual Funds

This is the fourth and last part of this series. If you have missed out any of the earlier ones, do click on the links below to read them.

Let’s talk onions – Part 1 – SIPs
Let’s talk onions – Part 2 – The fear of ‘Market Risks’
Let’s talk onions – Part 3 – Withdrawal strategy

In our example with the onions, the total investment, Rs.1000 per month for a ten-year period, was 1000 x 12 x 10 = Rs.1,20,000.

Let us assume that at the start of the investment, you had this entire amount in your bank.

Would you invest the entire amount in one shot right at the beginning (Lumpsum)? Or would you keep the money somewhere and invest 1000 per month (SIP)? In case you choose the SIP, where will you keep the money?

In the personal finance world, the ‘rule of thumb’ is to deposit the entire amount in a bond fund and then have an arrangement with the Mutual Fund house to transfer Rs.1000 per month to an equity fund.

The assumptions of the above strategy are as follows:

• The bond fund is safer than the equity fund.
• Keeping the money in the bond fund would not only get slightly higher returns than keeping in a savings account, it also prevents you from spending the money elsewhere.
• The returns of the bond fund is lower than that of the equity fund.

I do not agree with this strategy. In fact, I find most ‘rules of thumb’ to be flawed.

The reasoning is as follows.
Whenever we decide to make an investment – any investment, shares, mutual funds, property, gold, etc., the basic assumption is that the value of that investment will go up over the period for which we want to invest our money. Why would anyone invest otherwise? Say, the investment is for 10 years, the value (being market linked) is expected to go up and down in between, but our hope is that after 10 years the value will be substantially higher than the value when we invested. Also, the value of the investment will go up gradually over the years. In real life, it may not and we may incur a loss – that is determined by the market, but the reason for investing would be the hope that the value will rise.

If that is the basic assumption then it stands to reason that the value at the first time we invest will be lowest (or somewhere near about). Which means, in our example, we will get the onions cheapest when we make the first purchase. So, why spread out the investments and buy them costlier over time if you have the option to buy it at near the cheapest value?

So, my opinion is that if you have the money, invest it as a lumpsum amount. If you don’t have it and are planning to invest from your salary, then invest via a SIP.

Incidentally, as recent events have shown us – the bond funds can be as risky or even more risky than an equity fund.

Hope this series helped.

Niranjan Bangera


Submit a Comment

Your email address will not be published. Required fields are marked *

Written By: niranjan

Financially Stupid Niranjan


Want to improve your financial knowledge?

Join our mailing list to receive the latest news and updates from our team.

Would you like us to send messages on WhatsApp?

Do you want to invest through us?

We are grateful that you have subscribed to our mailing list!

%d bloggers like this: