Since the price of many large-cap stocks is available at a lower rate now, many individual investors are excited to do lumpsum invest now. So in this article, I am trying to explain the effects of lumpsum investment and how to avoid it.
Be it investing in shares or even mutual funds, lumpsum is not what I recommend. Never pool in your entire money in one shot. Especially in a time of a crisis when markets are highly volatile and unpredictable lumpsum investment is highly risky.
TATA MOTORS CASE STUDY
For example, if you are having a capital of Rs1 lakh. Then divide capital into 5 to 10 equal parts. And invest these small parts in different time zones. As you have invested the first Rs20,000 in February in Tata motors with the price of the share at Rs170. And you will get 117 shares in February. While in March the price of Tata motors went down to Rs70. If you are investing the next Rs20,000 in March then you may get 285 shares of the same company. By following this principle you are getting more than double shares. Also when the price fell drastically, you can make investments in other companies with the rest of the capital. While if a person is dumping enter Rs100,000 capital in February itself, then his investment value will be reduced by 50% in the first month itself.
By dividing your capital you are reducing a huge amount of risk. Systematic investment plans (SIP) by mutual fund companies also follow these principles.
From the last month, we got a lot of enquiries regarding longterm investing. Should I buy shares now, as the prices are too low?. Also, I read many articles comparing this current COVID crisis with the 2008 crisis. And many analysts stating out how people got huge returns when they invested in the 2008 crisis.
We always advise them to divide the total capital and invest in different time zones. Right now prices of many stocks are low. So if you are going to pump in your entire funds in one shot at Tata motors. And what if lockdown extends for some more months? What if the demand for passenger cars declines more as most people don’t have excess funds.?What if the current economic crisis worsens? So think about such possibilities too before dumping the entire fund by seeing the discount rate. The current COVID crisis is much worse than 2008, so better don’t compare with it. Start investing once our country is containing the virus and when all economic activities are back in action. And again try to divide your capital into 5 to 10 equal parts and invest in various sectors too.