How Should I Invest A Large Sum? All At Once Or Over Few Months

Question: What’s the best way & time to invest 5L keeping in view the current market levels are high? Do I break the money into a monthly SIP? Or how do I know when is the best time (to be specific, which month of the year) to invest expecting the prices to be low?

Do you have a way to evaluate from the past history/performance of the mutual funds selected by any manager, as to when is the time that mutual funds are low priced in an year so that we can push large amounts at lower prices?

Answer: As you are aware, we don’t believe that any one can predict the market. Mutual funds follow market cycles and there are no fixed months in which markets go down or up – else everyone will only invest in those months!

Investing theory recommends that if you have money, you should invest it right away. Since there is equal probability of market going up or down, by investing right away you eliminate that “risk”.

However, from a human psychology perspective this is difficult to come to terms with. Let’s say you have Rs 5 lakh to invest.

scenario A: you invest and the market moves down by 5%. You lose Rs 25,000 and you will be extremely upset.

scenario B: you don’t invest and the market moves up by 5%. You still lose Rs 25,000 but you will not be that upset.

This common behaviour has a name and is called “Loss aversion“.

This is why some would suggest that you invest the money over a few months. Please note that this does not eliminate the risk – only lowers the likely pain you might feel in case of a negative event (5% on 1 lakh hurts less). It also keeps your money un-invested for longer.

Please also note that you will actually be faced with the same decision every month but the stakes will be lower.

So the answer to your question lies less in market prediction and more in how you will respond to certain scenarios. Theory has an answer but it’s not a theoretical decision!

So, how do you decide?

My suggestion would be to not fret too much over it and simply spread the investment over a few weeks. Rs 50,000 every two weeks for 5 months, or Rs 25,000 every week for 5 months would be a good way to go. You can set it up in with your portfolio manager as monthly investments on different dates.

Happy Investing

Source:Scripbox