How to invest a lump sum in an equity mutual fund?

"If I have a lump sum, what is the best way to invest it in an equity mutual fund?", is a question that I am asked repeatedly. In this post, let us discuss simple ways to invest a lump sum in an equity mutual fund.

Lump sum in a debt mutual fund

Let us first get this out of the way. Suppose you wish to invest a sum in a debt fund (not, a liquid fund for STP) in line with your asset allocation, do so in one shot. There  is no need to hesitate.

These posts might be of help:

How to Select Debt Mutual Funds Suitable For Your Financial Goals?

Investing in debt mutual funds: slow and steady wins the race!

Lump sum in an equity mutual fund

(a) Stay away from STPs!

The SIP, STP and SWP are methods designed by the AMC to get steady business (SIP) and ensure a lump sum is locked with it (STP, SWP). They are of not of much use to investors.

The SIP is sold as a 'systematic' and 'disciplined' way to invest in the market. Before online transactions became a reality, that was probably the case. Not anymore. Don't get me wrong. I am fan of monthly investing aka MDBSC.  Just do not see any kind of advantage with a SIP now that investments can be made online in under a minute.

The STP is sold as a way to 'systematically' invest in an equity mutual fund, while the rest of money 'grows' in a liquid fund (some recommend the dividend reinvestment option) or in an arbitrage fund (dividend reinvestment option).  From the advisor's and AMC's point of view, this is intelligent marketing (some AMCs offer trigger STPs!) and good business sense. From the investors point of view. this is plain innumeracy.

The 'gains' made in a debt fund over a few months, while part of it gets invested gradually in an equity fund (STP) would be negligible compared to what the lump sum would (well, could) actually gain when directly invested in the equity mutual fund.

In addition, STPs are a needless tax hassles: the capital gain from the debt fund has to be accounted for (no guaranteed that dividend reinvestment will erase capital gains).

(b) Define a lump sum.

Most of us do not stop to define a lump sum. There are many ways to define it:

(i) Any sum much greater than monthly salary

(ii) Any sum which you would not spend without evaluation.

(iii) Any sum greater than daily loss or gain in your equity portfolio.

There could be other ways too. The idea is, once we define a lump sum, any sum lesser than this can be invested in an equity mutual fund in one shot. Any sum above the definition will be invested gradually (see below).

I think method (iii) is particularly useful in the current context.

When I started investing in equity mutual funds, my monthly SIP was Rs. 1500. I lost or gained 10s or rarely 100s of Rupees each day in the market. So Rs. 10,000 was a lump sum to me.

Today, God willing, I am able to invest much more each month. In addition, since my corpus is now half-decent I gain or lose much more on a daily basis. So today, Rs. 10, 000 is not a lump sum for me.  So is Rs. 1 Lakh. If I got that much with me to invest, I would invest it in one shot without hesitation.

My point is, defining what a lump sum is, help us draw a line. That line will keep changing with time (hopefully in the right direction). So the first step is to define a lump sum.

(c) time the market?

Timing the market has a pretty high probability of getting good risk-adjusted returns. However, it does not always lead to higher returns. Unless the distinction between risk-adjusted return and return is clear, I would suggest not investing anything. Most often,  timing, investing in "dips" etc. is done for psychological comfort.

Whether the market is at an all time high, or has just crashed, investing the lump sum in small chunks periodically is the simplest, stress -free option.

Personally, I see no need to automate this periodic investment, but if you wish, you can set up a STP.

(d) This is how I would invest a lump sum in an equity mutual fund

Ensure the funds are transferred to the bank account(s) linked to the AMC account.

Decide on how I am going to split the lump sum. For example, Rs. 1 Lakh into 4 parts of Rs. 25,000 each.

Invest each part manually and directly in the equity fund, once a week.

My goal is to complete the investment asap. No point investing once a month and stretching a lump sum over 6 months. One a week should do just fine. That is it.

What do you think?

Hey, my new book with Subra(money.com), You can be rich with goal-based investing is now available at Flipkart for Rs. 359/- only! Pre-order now!

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

52 thoughts on “How to invest a lump sum in an equity mutual fund?

  1. ravi kiran

    Sir, thanks for sharing your experience. I don't think one week gap makes much difference in terms of returns. It's only for psychological comfort I think. Kindly share your real life example of investing in fund through SIP, how u reviewed, why u stopped or shifted to another fund, shifted all units or just started a new fund in the same category.., etc.
    Thank you.

    Reply
    1. freefincal

      Yes I agree that it is only psychological. At one point in time, my SIP amt so large that I did not have money for monthly expenses. So I decided to stop my SIPs and manually invest. This gives me greater freedom wrt amount and also where I invest.

      Reply
  2. ravi kiran

    Sir, thanks for sharing your experience. I don't think one week gap makes much difference in terms of returns. It's only for psychological comfort I think. Kindly share your real life example of investing in fund through SIP, how u reviewed, why u stopped or shifted to another fund, shifted all units or just started a new fund in the same category.., etc.
    Thank you.

    Reply
    1. freefincal

      Yes I agree that it is only psychological. At one point in time, my SIP amt so large that I did not have money for monthly expenses. So I decided to stop my SIPs and manually invest. This gives me greater freedom wrt amount and also where I invest.

      Reply
  3. Hariharan Ragunathan

    Very interesting post as usual Pattu Sir. Investing 1 lakh over 4 weeks, and investing it in one go - how much that would reduce the risk of buying at a high NAV. If we apply this for the last one month on say any fund top 200 or I Pru discovery - did it really help by investing the money over four weeks - especially if I am investing this over a long term say 5-6 years duration?

    Reply
    1. freefincal

      Thanks. 5-6 years is not long term. More like 15-16 years! Over that period, how made this investment will not matter much. It is all in the mind.

      Reply
  4. Hariharan Ragunathan

    Very interesting post as usual Pattu Sir. Investing 1 lakh over 4 weeks, and investing it in one go - how much that would reduce the risk of buying at a high NAV. If we apply this for the last one month on say any fund top 200 or I Pru discovery - did it really help by investing the money over four weeks - especially if I am investing this over a long term say 5-6 years duration?

    Reply
    1. freefincal

      Thanks. 5-6 years is not long term. More like 15-16 years! Over that period, how made this investment will not matter much. It is all in the mind.

      Reply
  5. Sandip

    Nice article on lumpsum investment in equity fund, Pattusir. Just sharing my method of lumpsum investment _ sought ur views.

    As market is very volatile, I just keep a watch on market (various index, to get a fair view on their position). Whenever market is down (by more than 150/200 points), I invest a part of lumpsum.

    Reply
  6. Sandip

    Nice article on lumpsum investment in equity fund, Pattusir. Just sharing my method of lumpsum investment _ sought ur views.

    As market is very volatile, I just keep a watch on market (various index, to get a fair view on their position). Whenever market is down (by more than 150/200 points), I invest a part of lumpsum.

    Reply
  7. Anonymous

    Imagine that you are in December 2007. You have a lump sum to invest and you decide to do so over a period of four weeks ending December 31, 2007. And then in 2008 the stock market crashes by more than 50%. Some investors in such a situation might end up regretting investing so much money in equity. The worst reaction would be that you end up pulling the investment and booking a loss . And even if you had the courage to hold on it might take more than five years for your investment to recover their original value . Depending on the size of your lumpsum it might make sense to spread your investment over a period of say two years. Supposing you just inherited say 50 lakh rupees would you consider investing all of this 50 lakh rupees at one go ?

    Reply
    1. freefincal

      I do not disagree. However, 50L is not 'big' for everyone. Defining what a lump sum is, is crucial. People who regret losing money in the market will find some reason to do it.

      Reply
    2. Ujjwal

      As you gave the example of Dec 2007, what about Dec 2006. Suppose you had 12 lacs and you opted for an STP/SIP of 1l per month? What would be the result , you would lose massively as the Bull run happened in 2007. Same is the case in the last one year. The yearly gain is about 40-50% in the last one year, so if you had done STP or SIP from Aug to July 2015 instead of investing in one go at Aug 2014, you would have accumulated much less number of units. As we do not know which direction the market will take it is pointless to wait, if your goal is 10-15 years away. But overall this is a non-issue, the difference is not much. You will be fine either way, just maximize the amount and keep it in the market for the longest possible time frame.

      Reply
      1. Anonymous

        If the period was Dec 2006 or Dec 2005, then you could use the concept of value averaging. We first define a value path where the investment are expected to grow every month such that the annual rate is say 15%. So for Rs 10,000 the path might look like this.
        Month 1: Expected value at month end = FV(15%/12,1,-10000,0,1) = ₹ 10,125.00
        Month 2: Expected value at month end = FV(15%/12,2,-10000,0,1) = ₹ 20,376.56
        Month 3: Expected value at month end = FV(15%/12,3,-10000,0,1) = ₹ 30,756.27
        The actual amount to be invested = Expected Value - Actual Value of investment + SIP Value. So if markets heat up too quickly, you make little or no investments during that period.

        The concept is explained in great detail in the book Value Averaging: The Safe and Easy Strategy for Higher Investment Returns by Michael E. Edleson and William J. Bernstein.

        Reply
  8. Anonymous

    Imagine that you are in December 2007. You have a lump sum to invest and you decide to do so over a period of four weeks ending December 31, 2007. And then in 2008 the stock market crashes by more than 50%. Some investors in such a situation might end up regretting investing so much money in equity. The worst reaction would be that you end up pulling the investment and booking a loss . And even if you had the courage to hold on it might take more than five years for your investment to recover their original value . Depending on the size of your lumpsum it might make sense to spread your investment over a period of say two years. Supposing you just inherited say 50 lakh rupees would you consider investing all of this 50 lakh rupees at one go ?

    Reply
    1. freefincal

      I do not disagree. However, 50L is not 'big' for everyone. Defining what a lump sum is, is crucial. People who regret losing money in the market will find some reason to do it.

      Reply
    2. Ujjwal

      As you gave the example of Dec 2007, what about Dec 2006. Suppose you had 12 lacs and you opted for an STP/SIP of 1l per month? What would be the result , you would lose massively as the Bull run happened in 2007. Same is the case in the last one year. The yearly gain is about 40-50% in the last one year, so if you had done STP or SIP from Aug to July 2015 instead of investing in one go at Aug 2014, you would have accumulated much less number of units. As we do not know which direction the market will take it is pointless to wait, if your goal is 10-15 years away. But overall this is a non-issue, the difference is not much. You will be fine either way, just maximize the amount and keep it in the market for the longest possible time frame.

      Reply
      1. Anonymous

        If the period was Dec 2006 or Dec 2005, then you could use the concept of value averaging. We first define a value path where the investment are expected to grow every month such that the annual rate is say 15%. So for Rs 10,000 the path might look like this.
        Month 1: Expected value at month end = FV(15%/12,1,-10000,0,1) = ₹ 10,125.00
        Month 2: Expected value at month end = FV(15%/12,2,-10000,0,1) = ₹ 20,376.56
        Month 3: Expected value at month end = FV(15%/12,3,-10000,0,1) = ₹ 30,756.27
        The actual amount to be invested = Expected Value - Actual Value of investment + SIP Value. So if markets heat up too quickly, you make little or no investments during that period.

        The concept is explained in great detail in the book Value Averaging: The Safe and Easy Strategy for Higher Investment Returns by Michael E. Edleson and William J. Bernstein.

        Reply
        1. Arun

          Ahhh! A blast from the past... I did a lumpsum investment (pretty substantial) in Dec 2007. That was the first time ever entering equity. And we all know what happened in Jan 2008. Anybody heard of a fund called JM Basic... Lol ..

          Always enter the equities by spreading the investment around especially when the valuations are high. Ohh.. How I wish I had done this in Dec 2007. A period of good returns will lull investors into thinking equities are safe and nothing will go wrong. Even if equities run up substantially after your lumpsum, you don't want to be the guy holding a bad investment if by chance the bubble bursts..

          To wit, In Fred Schwed’s wonderful book, Where Are the Customers’ Yachts?,

          "Like all of life's rich emotional experiences, the full flavor of losing important money cannot be conveyed through literature. Art cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin either by words or pictures."

          Reply
  9. Govar Balakrishnan

    I agree sums like 1-2 lacs should perhaps go into the market in one shot. But what if the amounts are much greater? Like 25L, 50L etc.?

    I'm in a similar situation. Selling some land (potentially!) and decided to "quit" land. I've decided on an STP over a period of 12 months. Or perhaps even 18 months if the number is too big (eight digits). I agree that markets could be much higher in 2 years, but considering the current PE levels, it's unnerving to invest in one-go. There is a tax hassle, but suppose I go from arbitrage to equity over 18 months, the 2nd year gain is tax-free.. and that's some saving grace.

    There's always a risk in going either way, but I think 12 months is perhaps a balance if the numbers are very big..

    Reply
  10. Govar Balakrishnan

    I agree sums like 1-2 lacs should perhaps go into the market in one shot. But what if the amounts are much greater? Like 25L, 50L etc.?

    I'm in a similar situation. Selling some land (potentially!) and decided to "quit" land. I've decided on an STP over a period of 12 months. Or perhaps even 18 months if the number is too big (eight digits). I agree that markets could be much higher in 2 years, but considering the current PE levels, it's unnerving to invest in one-go. There is a tax hassle, but suppose I go from arbitrage to equity over 18 months, the 2nd year gain is tax-free.. and that's some saving grace.

    There's always a risk in going either way, but I think 12 months is perhaps a balance if the numbers are very big..

    Reply
  11. Arun Kumar

    For a relatively small lumpsum amount I would go ahead with the above approach..but I guess if the lumpsum amount is huge I would stagger it based on valuations ..ie if valuations are high the staggering period will have to be more and vice versa..Now different ppl can have different framework for the valuation metric to be used and staggering period..but the underlying logic is that at higher valuations the staggering period should be higher ..else a period like 2008 can create significant emotional stress which might lead to bad decisions

    Reply
  12. Arun Kumar

    For a relatively small lumpsum amount I would go ahead with the above approach..but I guess if the lumpsum amount is huge I would stagger it based on valuations ..ie if valuations are high the staggering period will have to be more and vice versa..Now different ppl can have different framework for the valuation metric to be used and staggering period..but the underlying logic is that at higher valuations the staggering period should be higher ..else a period like 2008 can create significant emotional stress which might lead to bad decisions

    Reply
  13. Praveen

    Dear Pattu sir
    Are you suggesting that instead of sip now since everything is online one can invest into direct equity Mf on a particular bad day of the month if one has the time rather than automating this process. Will this strategy change to look into a balanced fund if the lump sum is >than 10l and you don't need that money in the short term.
    Regards
    Praveen

    Reply
  14. Praveen

    Dear Pattu sir
    Are you suggesting that instead of sip now since everything is online one can invest into direct equity Mf on a particular bad day of the month if one has the time rather than automating this process. Will this strategy change to look into a balanced fund if the lump sum is >than 10l and you don't need that money in the short term.
    Regards
    Praveen

    Reply
  15. Arul Selvan

    I thought of some logic to do it :

    Invest the Rs 10 lakhs equally (Rs 20,000 per scrip) in all the 50 Nifty stocks.
    Then, if any scrip loses x % (which is more than 3 %), invest x multiplied by Rs 1000 worth in it.
    If any scrip gains by y % (which is more than 3 %), sell y multiplied by Rs 1000 worth of shares.

    Does it make any sense? It is just a thought. Maybe someone can make a spreadsheet and see if this would give any gain (over the last one year).

    Can any mutual fund follow this logic and make money? am giving the idea free of cost 🙂

    Reply
  16. Arul Selvan

    I thought of some logic to do it :

    Invest the Rs 10 lakhs equally (Rs 20,000 per scrip) in all the 50 Nifty stocks.
    Then, if any scrip loses x % (which is more than 3 %), invest x multiplied by Rs 1000 worth in it.
    If any scrip gains by y % (which is more than 3 %), sell y multiplied by Rs 1000 worth of shares.

    Does it make any sense? It is just a thought. Maybe someone can make a spreadsheet and see if this would give any gain (over the last one year).

    Can any mutual fund follow this logic and make money? am giving the idea free of cost 🙂

    Reply
  17. Rajnish

    Advice here did not make much sense to me personally. I understand the defensive behavior can lead to never investing to extent one should be. But again the margin of safety requires that you DO NOT lose the money. You are losing the money if you are investing in a product which is not likely to give you good returns. Do you seriously expect equities to give ,say 8-10% return over next 5 year annually if you invest today at the current levels ? I understand the long term part of it like 15 yrs horizon.. But to have a margin over "safe" products,each of your investment should have a reasonable chance of giving better returns. In your other posts, where you have shown the PE to returns graphs, its clear if you invest at such high levels, its going to take years for you to even match FD etc..
    I understand the temptation to "invest", participate in the markets but I am pretty sure if the investor is expected to have a horizon of 15 yrs for your lump sum investment, then he can be expected to have a disciplined approach towards investing his hard money at valuations which are reasonable as per some broad guiding pricing, say, market PE.

    Yes , you can take 25% of your lump sum investment and invest in a short period to participate in the game and but further investments should go in only if your criteria are satisfied (whatever they may be).. Market PE,indices etc..

    At the end of the day, its about controlling the urge and our own behavior..

    Reply
  18. Rajnish

    Advice here did not make much sense to me personally. I understand the defensive behavior can lead to never investing to extent one should be. But again the margin of safety requires that you DO NOT lose the money. You are losing the money if you are investing in a product which is not likely to give you good returns. Do you seriously expect equities to give ,say 8-10% return over next 5 year annually if you invest today at the current levels ? I understand the long term part of it like 15 yrs horizon.. But to have a margin over "safe" products,each of your investment should have a reasonable chance of giving better returns. In your other posts, where you have shown the PE to returns graphs, its clear if you invest at such high levels, its going to take years for you to even match FD etc..
    I understand the temptation to "invest", participate in the markets but I am pretty sure if the investor is expected to have a horizon of 15 yrs for your lump sum investment, then he can be expected to have a disciplined approach towards investing his hard money at valuations which are reasonable as per some broad guiding pricing, say, market PE.

    Yes , you can take 25% of your lump sum investment and invest in a short period to participate in the game and but further investments should go in only if your criteria are satisfied (whatever they may be).. Market PE,indices etc..

    At the end of the day, its about controlling the urge and our own behavior..

    Reply
  19. Parsh

    To me if you decide on lumpsum amount invest at once. Just the entire sum in one fund at once without any gap. I did that recently 3 months back.

    Reply
  20. Parsh

    To me if you decide on lumpsum amount invest at once. Just the entire sum in one fund at once without any gap. I did that recently 3 months back.

    Reply
  21. Aditya Bhargava

    Nice article Pattu Sir.!!! does nifty p/e makes a difference to the same as the current nifty P/E is at 23.45.One can think to sit on cash if your patience allow you to do that.

    Reply
  22. Shashi

    Pattu,
    Thank you for your post. I am a regular visitor to your blog, but posting for the first time.

    My wife and I were in a situation around 2 years back when we had a lumpsum amount to invest. We were not comfortable with investing all of it in one go, so we decided to invest it over three years. We followed the SIP route and each month we would invest a set amount across three funds (Large Equity, Mid-Cap, Debt). After a year though, we decided to invest all of the remaining amount. So we checked the asset allocation and invested the amount to match our desired asset allocation.

    Should we have waited for a better PE ratio (based on historical information)? Maybe. But, we think investing based on PE ratio is market timing and we are not good at it.

    Every 6 months, we plan to check the asset allocation and make the required adjustments if the asset allocation is off by > +/- 5%

    For an investment time horizon of 15-20 years, I hope this strategy will work out. Only time will tell 🙂

    Reply
  23. Anand

    Here's what I'd do if I had a large lumpsum amount:

    Put it in a liquid (8-9%) or Ultra Short Term Bond Fund (10% pa pretax)

    Check the 4Q trailing NIFTY and 1 or 2 year forward NIFTY P/E. If market valuations are unreasonable as it has been during most of the past 12m+, Wait.

    During every dip, invest small amount 3-5% (?).... esp, for equity funds. Even if that takes 5 years. It is better to earn 8-10% in debt fund and pay capital gains + retain capital to invest later rather than rush in when angels fear to tread.

    PS: Now, the question is how do I get that big fat lumpsum? No rich grandparent 🙁

    I am a beginner in this game, so hope my 'plan' makes some sense ...

    Reply
  24. nitin

    I have 10 lakh ,that I invested in icic flexible income plan daily devident short term depth fund ,I want to invest hole amount in equity mutual fund in 2 year,my depth fund is best for that or I change that fund because that fund is not gives good return, & my statergy is best or any change in that ?

    Reply
  25. Iyer

    So, after reading the article and the comments made thereon so far, the confusion still remains. Should one invest in lump sum or not.

    But one interesting point which I noticed from all comments done so far is this. Every one is scared about investing lump sum thinking that what will happen if that turns out to be the top for a very long time in future. Their concerns are genuine. Human mind always highly receptive to the emotions called "fear" and "greed". It is the fear that rules here.

    At the same time, I am yet to see a comment pointing out that what will happen if the market continues to raise for a very long time and this happens exactly at that point when one decides to go for SIP instead of lump sum. Most of us won't bother to calculate the difference of money (which one would have gained had he made lump sum investment) one would have gained by going for lump sum. Reason, any way even the SIP guy will also be winning in this situation.

    Can you see the difference here? It is the psychology. Perceived loss of profit is being treated differently than the actual loss of money. If you think rationally and unemotionally, loss will be loss in both cases.

    To summarize, there is no fool proof formula to invest lump sum amount. You will have to take the risk of loosing money in one way or other.

    Pattu sir, do you have any different opinion than this? I would love to hear

    Reply
    1. freefincal

      It boils down to how we react to notional losses. Those comfortable invest and those who are not, wait for it to go down.

      Reply
  26. Prabhat Tandon

    What should we do if the market is too high ? Is it wise to invest lump sum amount in the booming market too ?

    Reply
    1. freefincal

      If the goal is far away, it should not matter. If the goal is close, one should not invest in equity even if the market is 'low'.

      Reply
  27. Average Investor

    Could anyone do a calculation for the various methods mentioned above? Take market P/E as the starting point. Compare lumpsum v/s SIP for 3, 5, 7 years. Consider the tax on the debt portion of the investment. Which would be better in the end at say 10 or 15 years?

    Reply

Do let us know what you think about the article