SIPs are traditionally considered to be one of the best ways to systematically invest in the stock market, as it allows for automated periodic investments that benefit from rupee cost averaging. However, in certain circumstances, such as getting an inheritance or a large bonus at work, individuals may be looking to invest in a lump sum amount. In this article, we will take a look at a hybrid strategy that allows investors to effectively combine lump sum investments with SIPs for high returns.
Understanding the hybrid approach
The hybrid approach to investing involving SIPs and lump sum investments leverages two complementary investing methods. SIPs offer the foundation of your long-term investment through consistent and automated investments. On the other hand, lump-sum investments can allow you to take advantage of market dips and special opportunities such as IPOs. A combination of SIPs and lump-sum investments can thus help you create a balanced investing approach that can adapt to changing market conditions.
Implementing the hybrid approach
You can begin implementing your hybrid investing strategy by setting up your monthly SIP investments. Make sure you carefully consider which mutual funds you are choosing to invest in through SIPs. Ensure that the majority of your investments (60-70%) are in the form of SIPs. The remaining funds (30-40%) can be utilised for lump-sum investments during opportune investment times, such as during market corrections.
Market assessment
As your SIPs continue uninterrupted, make sure that you regularly keep an eye on the stock market to look for opportunities for lump-sum investing. Key investing opportunities include sharp market corrections, market dips, or emerging companies/sectors banking on new innovations (such as AI, automation, etc.). Consider investing a portion of your lump-sum funds when the markets experience a dip of 10% or more.
Risk management
It is a ideal to avoid putting your entire lump sum funds into the markets in a single investment. For example, the markets may continue to fall, which can make your lump sum investment a net loss. Consider spacing out your lump sum investment over a period of a few weeks to months during volatile periods to average out your losses and reduce risk. This approach will help protect your capital while pursuing growth opportunities.
Tracking performance
It is also important to regularly monitor the returns/performance of your SIP and lump sum investments. While SIP investments will generally offer consistent returns over time due to the nature of the market, the performance of your lump-sum investments may vary. If your lump-sum investments are not performing well, consider converting your future lump-sum investment plans to SIPs for simple automated investing that gets you results. However, if you are getting consistently high returns on your lump-sum investments, you can also consider increasing their proportion compared to SIPs.
To conclude
The hybrid investing strategy involving the combined use of SIPs and lump sum investing can be highly profitable for disciplined investors with a deep-level understanding of the market dynamics and economics. The success of this hybrid strategy depends upon the stable returns offered by SIPs while the lump-sum investments create opportunities for high growth. However, even if you choose to use this hybrid strategy, your main objective must be long-term wealth creation.
