Often many investors write to us saying they have a lump sum to invest in equity mutual funds and want to know how to plan and go about this —a discussion.
Ask yourself the following questions
1: Have you done a goal planning exercise to determine the right equity: fixed income mix for your goals? If you have not, then don’t invest anywhere until you do. If you want professional help, this is the perfect time to work with a SEBI-registered flat fee-only financial planner.
2: Will this amount be associated with single or multiple goals? For each goal, what is the current asset allocation if it is the latter? If I invest the total amount in equity, what will be the new asset allocation? Is the new asset allocation desirable for each need?
If the lump sum investment into equity will skew the asset allocation the wrong way (too much equity for the goal), then it would be better to suitably split the investment between equity and fixed income per each goal’s needs.
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Assuming it is okay to invest the lump sum into equity, it is best to define it.
3: What is the value of this lump sum divided by your current equity investments? For example, if this lump sum is just 10% of your equity investments, it is quite small, and the investment can be spread over a few months. Large sums can be spread over longer periods. We recommend not exceeding one year.
4: What is the value of this lump sum divided by your monthly investment in equity? For example, if this lump sum is 2.5 times, it can be spread over 2-3 months. The same recommendations as above apply.
First, there is no need to invest the lump sum in a liquid fund or any other kind of debt or arbitrage fund and start an STP. As long the goal is several years away, the sooner you deploy the money into equity, the better, and this can be done directly from your bank account to the fund over a few months. 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 lump sum stays with them from day one. There is no benefit for the investor in doing this.
In summary, once the investor decides a particular lump sum investment in equity is suitable for their future needs, they can spread the investment over a few weeks to a few months as per their comfort and directly invest from their bank accounts to the equity fund. All that matters is that we invest it without hesitation. Over the long term, market volatility will ensure the investment method is irrelevant.
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