A reader asks, “I have a sum of Rs. 10 lakhs to invest for the long term. How should I invest this in equity mutual funds?”
Please ask yourself these questions first.
1: Will this amount be associated with a single goal or multiple goals? If it is the latter, for each goal what is the current asset allocation? If I invest Rs. 10 lakhs in equity what will be the new asset allocation? Is the new asset allocation desirable for each need?
If Rs. 10 lakhs investment into equity will skew the asset allocation the wrong way (too much equity for the need), then it would be better to suitably split the investment between equity and fixed income as per the needs of each goal.
Now, assuming it is okay to invest the lump sum into equity, it is best to define the lump sum.
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2: What is the value of this lump sum divided by your current equity investments? For example, if you currently hold Rs. 1 Crore in equity, then this lump sum is 10% of your equity investments. If you only hold Rs. 18 lakhs in equity, then the ratio is 55%
3: What is the value of this lump sum divided by your monthly investment in equity? For example, if you invest Rs. 4 lakhs each month in equity, this lump sum is 2.5 times larger. However, if you invest Rs. 75,000 in equity each month, this lump sum is about 13.3 times larger.
So that gives you a measure of how big this lump sum is. A lump sum that is only 10% or lower than your equity holdings can be invested in one shot or may be spread over a few weeks. The same applies to a lump sum of only 2-3 times your monthly equity investment.
First, there is no need to invest the lump sum in a liquid or arbitrage fund and start an STP. Directly and manually invest the money from your bank account to an equity fund gradually over a period of your liking – over ten weeks or over ten months. It matters little over the long term. See: Investing a lump sum in one-shot vs gradually (STP) in an equity mutual fund (backtest results).
Just choose a duration that makes you comfortable, but please do not claim it is a superior choice or will produce a better outcome. No one knows that!
People associated with mutual funds will tell you to park the money in a liquid fund and then start an STP in an equity fund. They do this to ensure the ten lakhs stay with them from day one. There is no benefit for the investor in doing this.