SIP or lump sum?

A suitable asset allocation is typically based on one’s investment horizon and risk appetite.
By Morningstar |  21-06-18 | 

My age is 50 and I wish to invest a few lacs of my savings into 2 or 3 funds. The first goal is my son's higher studies (3 years away) and the second is to have retirement money. Should I put in lump sum or do SIPs? Could you suggest a few funds? I have already invested in Franklin Templeton and DSP Black Rock Smaller Companies Fund.

- Tarun

While constructing a portfolio, asset allocation mix (i.e. the mix of various assets including equity, debt, gold, etc.) is considered as one of the key determinants of the portfolio’s performance, in terms of risk & return. A suitable asset allocation is typically based on one’s investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. For example, if the investment horizon is 10 years and above, then 70% to 80% of your investment portfolio could be allocated to equity and 20% to 30% to debt. In case you hold other debt investments, in the form of PF, PPF, etc., fresh investments could be made into two or three equity funds through monthly Systematic Investment Plans or SIPs.

Given the strong performance of the equity markets over the last couple of years and the resulting rise in valuations, prospective returns seem to be slighter lower than previous years. In such a scenario, it might be advisable to invest through SIPs vis-a-vis lumpsum. In fact, SIPs allow an investor to deploy the principle of rupee cost averaging to take advantage of market volatility. When the net asset value, or NAV of a fund is high (typically when markets have risen) fewer units of a fund would be purchased from the investment amount and when the NAV is lower more units of a fund would be purchased with the same investment amount. Thereby, reducing the average cost of units purchased over a period of time.

When selecting funds, it is advisable to consider their performance over at least the previous three years to five years. This along with studying calendar wise performance vis-a-vis benchmark indices (like Sensex, Nifty, etc.) and peer group would indicate consistency across time frames and market cycles. Additionally, you could consider the fund’s AUM (AUM should be greater than Rs 500 crore.) and period of existence (longer the better). To evaluate mutual funds across categories, one can look at Morningstar’s star ratings and analyst ratings for funds. ( One should consult his/her financial adviser before making investment in mutual funds.

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