Time To Invest In Lumpsum?

At present the market seems to be directionless and is down by 6 per cent from its recent lows. In such a scenario, investors often try bottom fishing and invest at the bottom to get maximum returns.Therefore, there is a general feeling that investing a lumpsum amount at this stage would make more sense. The article explains market valuation and whether or not at the current juncture investing a lumpsum amount would be the right approach

In the wake of giving spectacular returns in the last one and a half years, the market (Nifty 50) halted to take a breather, sliding into a consolidation phase in November 2021. Nifty 50 made an all-time high of 18,604.45 in October 2021 before it moved into a corrective phase, making a low of 16,410 in December 2021. Thereafter, on January 18, 2022 it tried to breach its all-time high but failed to do so and continued on its southward journey once again. Nonetheless, post the Union Budget it started showing a good upward movement.

That said, the market is moving into a wide consolidation phase where the breaching of the price at either side of the range would suggest the next move of the market. As a result, at present the market seems to be directionless and is down by 6 per cent from its recent lows. In such a scenario, investors often try bottom fishing and invest at the bottom to get maximum returns. Therefore, there is a general feeling that investing a lumpsum amount at this stage would make more sense. 

For those who are new to mutual fund investing, there are two ways one can invest in them: one-time investment via lumpsum or via a systematic investment plan (SIP) or systematic transfer plan (STP). Hence, in the following paragraphs, we will attempt to understand the market valuation and whether or not at the current juncture it makes sense to invest lumpsum. In the table below we have listed the lumpsum returns and SIP returns of the top 10 equity mutual funds in the last five-year timeframe. 

Maximum Drawdown and Lumpsum

You need to remember that when you are investing in lumpsum you are investing in a single go at the existing market level. However, when it comes to SIP, you are buying units of mutual funds at different levels. Thereby, SIP enjoys the benefit of rupee cost averaging. This is because when you invest in SIP you end up buying more units during a bear market and lesser units in a bull market. Therefore, investing through the SIP route is somewhat less risky than lumpsum as you are not much worried about the timing of your investment and are investing systematically. Lumpsum investment is usually recommended for experienced investors who understand the nuances of the market in a better way.

Although investing in lumpsum at the appropriate market levels does reward better than SIP, the investment risk is at a higher end in case the market falls against your expectation. Historically, we have seen that when the equity market drops it does not stop at 6 per cent but goes beyond that. To understand the fall in the equity market, we have illustrated the Nifty 50 Total Returns Index’s (TRI) maximum drawdown for the period January 2000 to December 2021. The maximum drawdown for Nifty 50 TRI for the period of study works out to be negative 59.5 per cent. Out of 5,472 observations, 55 per cent of the times the drawdown was between 0 per cent to negative 10 per cent while it was only 15 per cent of the times when the Nifty 50 TRI headed below negative 30 per cent. The rest 30 per cent of the times the drawdown was between negative 10 per cent to negative 30 per cent. This shows that it is indeed risky to invest in lumpsum at the current level. This is because the market may slip further down and investors entering now may erode their wealth. As such, adopting a tactical asset allocation strategy in such a case would be more reasonable

Market Valuation and Lumpsum

Now that we have understood the risks involved while investing via lumpsum with respect to maximum drawdown, let us move on to understand the current market situation and valuations. The Union Budget 2022 was announced on February 1 by Finance Minister Nirmala Sitharaman wherein although there was nothing to cheer from an individual investor’s perspective, yet from the economic perspective it made sense, which therefore pushed the market upward on that day. In order to check the market valuations, we have used the price to earnings (PE) and price to book (PB) ratio of Nifty 50. Although the PE seems to be reverting to its long-term mean, the PB ratio seems to be stretching above + (1) standard deviation. This means that in terms of valuation there are mixed results as the PE is showing close to fair valuation and the PB is depicting somewhat stretched valuations. In such a situation, it is always better to invest cautiously. Therefore, investing systematically is advisable in the present market condition as per the above valuation metrics.

So, if you wish to invest lumpsum then invest via STP rather than investing in one go. At DSIJ we have developed our proprietary equity valuation metric known as ‘Equity Sentiment Index’ which also takes into account valuation of the debt market through G-Sec 10-year bond yield. This helps us to take a better view of valuation of the overall equity market. Therefore, with the confused state of PE and PB ratios, let’s look at what the Equity Sentiment Index wants to say 

As can be seen, our index is suggesting a neutral view on equity market valuation. Therefore, as of now it makes complete sense to strike a balance between the equity and debt proportion of the portfolio. This means that at the current market situation there is no clear path and hence investing 50 per cent in equity mutual funds and 50 per cent in debt mutual funds is advisable. However, we are more interested in choosing an investment route at the current juncture. To know this, we take into consideration the history and try to understand how SIP and lumpsum investments performed in three and five years when the Equity Sentiment Index was at this level. The last time this index fell below the mean was on August 5, 2011. Hence, we took that point and calculated three-year and five-year SIP and lumpsum returns from thereon. In the study we assumed that the amount invested in SIP was Rs 10,000 per month for three years and five years. Whereas for lumpsum we assumed that you had invested Rs 3.6 lakhs and Rs 6 lakhs for three years and five years, respectively. Looking at the results, SIP returns scored over lumpsum.

Although the market seems to be neutral, some pockets do show signs of strength where investors can think of investing a lumpsum amount. In order to understand this, we analysed the relative rotational graphs (RRGs) which are used to understand sector rotation. Here the relative strength and relative momentum are calculated for sectoral index as against the broader index such as Nifty 500. Depending on the values, these sectoral indices are divided into four quadrants – leading, lagging, weakening and improving. This usually suggests in which quadrant a particular sector is presently in and where it is heading. The analysis of the RRGs for the week ended January 29, 2021 shows that while the IT sector continued to show relative momentum and stayed in the leading quadrant, the energy index rolled inside the leading quadrant again. Alongside, the automotive index was also inside the leading quadrant. The realty and media indices continue to languish inside the weakening quadrant along with the Mid-Cap and the PSU Bank index. The PSU Bank index appears to be rebuilding on a relative momentum front.

The Nifty Services Sector index is seen rolling inside the weakening quadrant. Nifty Bank and FMCG indices are inside the lagging quadrant; however, they appear to be improving on their relative momentum along with Nifty Financial Services index. Nifty Pharma and Nifty Metal indices are inside the improving quadrant. They are likely to show stock-specific relative outperformance against the broader markets. Hence, investors can consider investing in sectoral themes. However, this can prove to be a risky bet and therefore only aggressive investors should invest in them by aligning such investments with their satellite portfolio.

Ways of Investing in Mutual Funds

Lumpsum
It is a one-time investment that you make, as for example, investing Rs 1,00,000 in Nifty 50 Index Fund. This option has its own pros and cons. If you are investing in lumpsum then it is important for you to understand the pulse of the market. Moreover, if you have a substantial disposable amount in hand and have a higher risk tolerance then you may opt for investing a lumpsum amount.

Systematic Investment Plan (SIP)
A systematic investment plan or SIP is an investment option via which you can invest in mutual funds in a gradual manner. This means here you would be investing a fixed sum periodically. The periodicity can be monthly, quarterly, semi-annually or annually. Some mutual funds offer daily as well as weekly SIPs. However, the most popular periodicity is monthly. It is believed that when you invest in this format it becomes easier for you to meet your financial goals.

Systematic Transfer Plan (STP)
Unlike SIP, systematic transfer plan or STP is one such term that many investors are not aware of. This investment option is similar to SIP but the only difference is the source of investment. In case of SIP, the money is transferred from a savings bank account to a mutual fund scheme but in case of STP the money gets transferred from one mutual fund scheme to another. STP can prove to be a smart investment strategy that helps you to stagger your investment over a specific term in order to reduce risk. Say, for instance, you have lumpsum amount available at your disposal but presently the market is volatile and investing in one go can be risky. Therefore, the asset management company (AMC) allows you to invest lumpsum in one fund (mostly liquid fund or debt fund) and gives standing instructions to transfer a fixed amount regularly to another scheme of your choice. The former fund is called source scheme and the latter is referred to as the target scheme.

Systematic Withdrawal Plan (SWP)
For investors who want regular cash flow from their investments, the obvious choice would be bank fixed deposits or postal deposit schemes. However, with interest rates declining from these avenues, investors are seeking option to support their future income needs. Mutual funds offer a perfect solution as it has an option called systematic withdrawal plan (SWP) via which investors can withdraw fixed amounts at regular intervals similar to that of SIP from lumpsum investments. Investors can give standing instructions to the AMC to redeem fixed amount or units for a selected periodicity. This will enable investors to receive regular income right into their bank account. However, investors need to note that as the action of redemption takes place, they are subject to exit load and taxation.

Conclusion
As per the valuation metrics PE and PB as well as the Equity Sentiment Index, the current situation is depicted to be neutral. This means the near-term path of the market is not clear. Therefore, we conclude that at the current point in time, investing in lumpsum can prove to be a risky proposition. Hence, invest via the SIP mode or invest lumpsum in a liquid fund and stagger your investments via STP. Even our hypothesis suggests the same. However, if you are investing via lumpsum then you should remember one important thing – one cannot really catch the bottom. Even experts with years of experience in the market fail to understand when actually the market hits the bottom.

Therefore, as an investor it is always prudent to not try to catch the market bottom or market top. Rather than doing so, it’s better to have a disciplined approach towards investing. If you are someone who has a good amount of experience in the market and can understand the pulse of the market, investing in lumpsum would reap better results rather than investing in SIP. There are a lot of studies carried out around the world to understand whether lumpsum is better or SIP. Most mutual fund intermediaries claim that investing via SIP is better than lumpsum. However, that’s not the case as SIP and lumpsum are just two options that a person has to invest in mutual funds. For someone who does not have lumpsum amount at disposal, SIP is the best option available. This would not only help you invest systematically but also inculcate a sense of discipline.