Retail investors appear to be more worried about short-term market movements rather than long-term investment opportunities in the equity market.

The barometer indices BSE Sensex and S&P CNX Nifty have recorded insignificant returns on a year-to-date basis, further affecting the sentiment of retail investors.

‘Is this the right time to invest?' seems to be the biggest question on most retail investors' minds. Besides, what strategy has to be adopted now — is it better to go through a lump-sum or systematic investment plan are other questions that often creep in. Here is an attempt to address these concerns.

Time horizon

Investors with a time horizon of 3-5 years should start investing in equity rather than looking at indices.

Even if there is economic turbulence or dips in the performance of certain sectors, a long-term horizon provides enough time for economies to revive and also even out other abnormalities. Equity funds become riskier asset classes if your holding period is shorter.

How funds fared

After a sluggish start from the lows of last year, the majority of diversified equity schemes beat the barometer indices BSE Sensex and S&P CNX Nifty. Over a one year period, diversified schemes averaged a return of 26 per cent and bettered both the bellwether indices by 11 percentage points.

The year-to-date Sensex and Nifty clocked 1.8 per cent and 2.5 per cent respectively but 50 per cent of the large-cap funds clocked absolute returns of 5 per cent. This suggests that active stock selection paid off during this sluggish phase of the market.

Lumpsum or SIP

So, if funds do outperform markets, the next question is whether to go for a lump-sum or SIP strategy. An investor who opted for lump-sum investments in the market peak of early 2008 and lost 50 per cent in the same calendar year may well advise you to go through the SIP route. But those who invested through lump-sums in March 2009 would now be sitting on huge profits.

Under lump-sum investment, you can maximise the returns whereas, in SIPs, one can optimise the returns. If your financial goal is 5-10 years away and you have the patience, then lump-sums should not be a worrying factor, provided you have chosen the right scheme.

Despite the Sensex and Nifty trading at discounts to their peaks, one in five diversified schemes' NAVs managed to hit new peaks, demonstrating their capability.

Systematic Plans

Returns made from a systematic investment plan may sometimes trail the market during protracted rallies but the cost-averaging helps mitigate the downside. It has been seen historically that there is an influx of investors into SIPs when markets hit their peak but dwindle as the market corrects.

This strategy of stopping SIPs in a declining market does not help the strategy behind an SIP which is to average costs.

For instance, during the 2008 correction, more SIP accounts were closed and, just before the market recovery in 2009, the accounts closed far exceeded the new additions. Such a strategy would be against the thumb rule of buying low and selling high and defeats the rupee-averaging technique of a SIP.

Lump-sum for the long-term and patient investor and SIPs for those with conservative approach are strategies that work for the different classes of individuals.