MF portfolio construction – One time purchases vs SIP

As we have been discussing in the posts concerned with the construction of a MF portfolio, SIP or a modified version of it is the most normal investment mode of purchasing MF. This makes logical sense from 2 aspects – firstly, you are unlikely to have a supply of money frequently that will allow you to make a large one time purchase and secondly, it is a good practice to spread your purchases over a period of time to take advantage of varying purchase prices as a way or lowering risks.

But what if you had enough money to invest one time in your MF portfolio? How should you go about it then? Let us say you had 3 lacs available at the beginning of April 2015. So, do you buy into your portfolio with the entire amount in April or do you buy into your portfolio with 12 equal monthly purchases of 25 K each. For many people this question may not arise as the money supply is just not there, but if you were to take that constraint out then which will be a better approach? Most people will probably say that you keep your money in a Liquid fund and do an STP of 25 K per month etc. The assumption here is if you buy over a period of time then your unit prices will somehow be lowered.

This assumption however, is true only in the case of a falling market. If the markets are going sideways or they are rising then a one time investment will actually make more sense than a SIP. If you take different years as example and calculate the returns of a one time investment versus regular SIP then you will see there is very little difference in the actual outcome. Try this out using different calculators available in the other blogs, I do not want to repeat it here. The other thing that happens with a one time investment is that all your units purchased get the maximum time available for growth. Again, this is a great idea in a rising market and a not so good one in the falling market.

One of the things I feel investors should do is to not be completely mechanical about their SIP investments. Most of us decide on an amount, give a bank mandate and leave it at that. Nothing wrong with it if your available investment is relatively fixed for a couple oh years and you do not want to change anything. I prefer being in control of it myself so that I can vary the investment depending on the market situation and my availability of money. So, while I have regular SIP for the funds in my portfolio, I also make one time purchases in these funds based on the market situation. Of late, of course, I have started following the approach that I have detailed on another post talking about how to do a modified SIP.

The availability of money is another factor that one needs to consider and this is obviously connected to the life stage the investor is in. For people in the age group of 25 to 40, regular family expenses along with a home loan EMI and other asset purchases often means that the amount to be invested is relatively defined. Exceptions can be in the events like yearly bonuses or variable pay. For such investors a regular automated SIP along with some specific one time purchases when extra money is available will be the way to go. In the latter stages of working life however, the situation changes quite a bit. Home loans get over, children go off to college and their expenses get funded through redeeming other financial assets and incomes tend to peak. It is not unusual for families to have high surplus for investment at this stage. One way to use this surplus will be to bump up your MF portfolio through one time purchases of reasonably high amounts, while keeping the regular SIP going, another can be to invest aggressively in direct stocks so that you build up that portfolio now.

If we believe that our markets are going to go up in the long run then the earlier we are able to invest in MF portfolio the better for us. Compared to your stock portfolio an MF portfolio is more time sensitive, though both will have greater chances of doing well over the long run. My suggested strategy will therefore be to keep investing in MF through SIP and one time purchases till you have covered your investment plans for that part and thereafter put more money into stocks.

One of the other issues in the MF portfolio construction is the question as to whether you should be investing in NFO. Most people will say no and I think the understanding is fallacious. Will cover this in my next post.

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