Decision Tree to choose between SIP and Lumpsum​

What is a Decision tree?

• It is a diagram, in which tree branches represent different criterion leading to different choices that carry different risk, return, costs & responsibilities.

• Decision trees are used to simplify complex decisions and make decision making a reasonable and logic-based process.

Using a Decision Tree to choose between SIP & Lumpsum

Investment decisions can sometimes seem very complex and conversely at times seem very simple. In both cases the reason is usually lack of a proper process for decision making. Since, one of the best ways to simplify complex (& seemingly risky) decisions is to set up a decision-making process, it can also help simplify investment decisions.

Before using a decision tree, one needs to be aware of the factual as well as emotional aspects of SIP & Lumpsum investing. And list down all the facts related to their situation & personality.

Below are excerpts from the earlier articles where I explained the factual and emotional aspects of SIP vs Lumpsum investments styles. Let’s look at what the previous articles concluded –

Article 1 – SIP is mostly preferred as it is much easier than keeping money in your savings account every month and trying to invest lump sum at best possible time to get highest possible returns. SIP too can prove to be inefficient if you have a large sum of windfall gain like a bonus, inheritance which you keep investing through SIP in tiny amounts. Then that sum will end up in giving you slow returns compared to Lumpsum.

Article 2 – If you are someone who needs constant poking to save/ invest and gets scared by temporary swings in your invested capital, you should consider SIP to instil a discipline in yourself. On the other hand, if you are someone who can resist spending the amount you have kept aside for investing later and are not so much scared by market volatility, you can consider Lumpsum investing.

(To make your own Decision Tree you would need to go through both the articles above and write down all parameters applicable to you.)

Using the information given in both the articles, every individual will have to make a decision tree for himself/ herself. I am sharing a couple of sample decision trees to provide some idea on how to build a decision tree. If you are still facing difficulty in making a decision tree for yourself, do get in touch for a free online session on making the ‘SIP vs. Lumpsum’ decision tree.

Sample Decision Trees

Sample decision tree 1 – When you have money available to invest from – windfall gains/ inheritance/ bonus etc. This money you are not going to need for at least next five years. Lumpsum seems to be the obvious choice here but in many situations, you might still be better off investing the sum in small instalments over a period of time. Study the decision tree below to understand why.

Select which facts/ behaviours apply to you (& your situation) after reading Part 1 & Part 2 of the SIP Vs. Lumpsum articles and build your own decision tree.

Sample Decision Tree 2 – This is for when you want to start investing but don’t have a Lumpsum amount available right now. SIP seems to be the most obvious choice, but in some situations Lumpsum investing (at a later point) might be the solution for you. See the decision tree below to know how.

Same as above example select which facts/ behaviours apply to you (& your situation) after reading Part 1 & Part 2 of the SIP Vs. Lumpsum articles and build your own decision tree.

There can be many more situations and many more combinations. For each individual it’s going to be a unique decision tree. Have a go at it and try to make one for yourself for your current situation.

If you need help, please get in touch with me for free 30 minutes session to build your unique investment decision tree.

Choosing between SIP and Lumpsum can be really simple and easy once you have understood the basic factual and behavioural traits. Do read both the Part 1 & Part 2 of ‘SIP vs. Lumpsum’ to understand and choose between SIP and Lumpsum investment styles in simple non-jargon terms.

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