We have often heard and read the tagline in the ads that “ Mutual Fund investments are subject to market risks”. Unfortunately, when we think of investing, such catchphrases sow some doubts in our minds. Often, we wish we had some personal investment advisor who understood our investment profile and suggested accordingly. Yet, even we do not know what our investment profile is at times.
What is an investment profile?
The investment path a person should choose is quite a unique and individualistic one. It depends upon many factors like your current income and expenditures, savings, the amount of spare money in hand, your risk appetite, and financial goals (long term or short term etc.). Each of these factors differs for all individuals. For example, while some invest to augment the income, others may do so for reaping from the money in hand.
The financial goal for each person may be different too. Age is significant factor in deciding the investment profile as well. Young people prefer to invest to meet their milestone goals like purchasing a house, education of children, and retirement. However, seniors may already have achieved most of these milestones. Hence, their investment profile and financial goals are bound to be different. It is essential to understand your inflow, outflow, and financial goals before you decide to invest. It may take some time to shape, and it’s best to discuss it with all stakeholders to know what’s possible.
Where to invest?
Once your investment profile is understood, the next step is to look for options to invest in. For seniors looking to invest in traditional modes with fewer risks, enough options are available. However, investments in stocks, equities, mutual funds, etc., are always carry some element of risk. The two modes of investment in mutual funds are SYSTEMATIC INVESTMENT PLAN (SIP) and LUMPSUM.
Either of these investment options needs to be understood to see if they meet your requirement of financial goals. There is always a chance that you my want to go with a mix of both as well. But to decide that, we need to understand what each offers and the risks involved. Typically, lumpsum investments are made with extra funds available to gain more returns. People make SIP investments when they can keep investing regularly in small amounts. There are pros and cons of both that need to be understood and evaluated.
Lumpsum Investment
This mode of investment option with high returns but involves high risk. Here, we invest a lumpsum in the market (equity, debt, fixed, etc.) and the whole amount is subject to market volatility. The tenure is also mostly long-term, and that is convenient for some. However , lumpsum investors should also time their entry when the market is low. That is when the returns become maximum when the market goes upward. However for the same reason, lumpsums usually offer lesser options for diverse investment portfolio.
Hence, it is advisable to invest in lumpsum only if you can spare large amount of money and have higher risk appetite. Most lumpsum investments are multiples of thousands or lakhs and above. Many funds in India have set lower limits at Rs 5000. Lumpsum investments can prove to be stressful at times. However, options are available to park the lumpsum in debt funds and shift them periodically to the equities to offset the market volatility. Seniors who can spare money beyond regular expenditure and emergency liquidity can opt for lumpsum investments.
SIP Investments
It is a regular mode of investment which can be daily, weekly, monthly , quarterly, half-yearly, etc. The amount may be as little as Rs 500 and can go upward based on risk profile. SIPs offer benefits that suit many investors who are not hard-core market watchers. It is an ideal stress-free investment options.
SIP investments are staggered investments over time and hence, can handle market volatility better than lumpsum investment. SIP investments allow averaging the equity costs. It will be a mixed portfolio of some equities purchased at high price and others at a low price. SIP investments follow the compound interest mode as the interest earned is invested back in the fund, assuming higher returns.
SIP is east to set up using a bank auto-transfer option that eliminates missing out. It teaches a habit of investing and is best for beginners. It also helps invest in a diverse portfolio. For seniors, SIP is an option to consider when you have spare money from regular income like pension, rent or interest income, etc.
What suits you best
You are the best judge for what suits you best. Ideally, seniors can have a mixed portfolio, wholly dependent on their investment profile. Parking in traditional investments like a fixed deposit (FD) helps with easy liquidity for emergencies. Post Office or Pension schemes help with regular income, while SIP investments can help with returns on the spare money. A moderate amount in lumpsum investment is good, provided it is done with some solid homework on the market trends.
Waiting for your feedback on this blog.
Anil Malik
Mumbai, India
23rd July 2024