I am new to equity mutual funds how should I invest a lump sum?

Published: August 27, 2021 at 8:27 am

Last Updated on August 27, 2021 at 8:27 am

This is a question received on our YouTube channel:  “Hi, I am aged 30. New to your videos and blog. I have been hooked to it for the past two days. Can you make a video on “How to invest your 60% equity allocation”? Where, assume I have one crore with me, and I have invested 40L in fixed income (PPF, EPF and Debt mutual fund). And the remaining 60L is in savings which need to be invested in equity. So, how should one approach this? Should one start investing monthly 1.3L for the next 3 years to lower the risk? Or wait for the market to correct a bit (Given the current market valuation) and add 30% (of 60L) as a lump sum and rest divided for 3 years etc.? Basically, how would you invest your 60L if you were to start investing fresh in equity?

The question itself may be hypothetical because the person may not have that big an amount available for investment. However, there are many aspects to this question that may be of use to a wider audience. Hence this article. We shall focus on “how to invest a lump sum into equity?” and “how should a newbie do this?”.

The first step is the desired asset allocation, which is happily in place: 60% equity and 40% fixed income. In this case, the initial equity allocation is zero, and the person wants to increase it to 60%. Typically even those with existing 60% equity holdings think twice about investing a lump sum, and there is nothing wrong with it.

The next step is to define a lump sum.  I prefer to define it as any amount several times more than what we invest or what we can invest each month into stocks or equity mutual funds.

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For example, if you are already running a SIP for Rs. 10,000 and wish to invest 60% of your bonus = Rs. 30,000 into equity is that a lump sum? If you are a new investor, you can divide that amount into three instalments invest it over three months. If you a seasoned investor, you may not hesitate to invest it in one shot.

How about Rs. one lakh? Even a seasoned investor would consider spreading the investment over a few months. So two aspects govern how we handle lump sum investments into equity: (1) What we define as a lump sum, and this is relative to what we invest (or what we have already invested) and (2) our experience.

What does experience mean here? When we start investing in thousands each month, we will see our portfolio fluctuate up and down in tens-hundreds every day. That is, you would lose or gain that much. As we keep investing more and our portfolio grows, the daily or loss gain would grow to thousands, the ten-thousands and lakhs.

A person who loses or gains a couple of lakhs daily would not bat an eyelid about investing Rs. 10 lakh over the course of a few days, if not at once. Lump sum investing is more a behavioural issue -about how we perceive risk.

We have already backed tested enough of the technical aspects:

The duration over which you stagger the lump sum investment does not matter; lump sum vs STP does not matter too! Sometimes STP does better and sometimes lump sum. There are irrelevant considerations.

What matters the most when it comes to lump sum or even systematic investing in equity is our ability to master regret and joy. Imagine a football match. The goalkeeper gets the ball and throws it towards a defender. Before the ball reaches the defender, the opposing striker intercepts and strikes a goal, we would all blame the goalie for conceding the goal with a poor throw.

What if the defender got the ball from the goalie passed around a few times among his teammates, then a goal was conceded? We will then not blame the goalie for choosing that defender. Why? After a couple of passes, we do not keep track and accept that “things happen” in sport.

The same thing happens with equity investing too. If the market falls the day after we invest, we are filled with regret about our choice of investment date (or SIP date!) If the market falls a few months later, our regret is much lower.

To be successful in equity investing, we must master regret in a sense we must be ready to embrace loss no matter when it happens – minutes after we invest or months. It is not easy, but it is possible with conditioning.

A simple axiom works for me:

The market will fall only after I invest.

So when I invest does not matter; How I invest does not matter; What matters is to get to my target asset allocation as soon as possible.

Similarly, we must also master joy.  Premature declarations of great returns are immature:

If we do not teach ourselves moderation and equanimity, life will and it will not be pretty!

So how to invest a lump sum into an equity mutual fund or stocks?

The worst mistake you can commit is “waiting for the right time to invest”, “waiting for a correction”. I am willing to wager that more wealth is lost waiting on the sidelines than in the high seas of equity.

Yes, it is an excellent idea to spread your investments, but not for a lifetime! For example, if you have an investment tenure of 15 years left, spread the lump sum over the course of 10-12 months and not more. The long your delay, the more you would want to tinker with it – wait for a dip. The sooner it is deployed, the better off we would be.

But the market is at an all-time high. Shall I wait?  For what? You have to invest someday, and the market can and will fall after that. You cannot say I want to learn boxing, but I am waiting for the right time so that I don’t get hit. You will get hit whenever you start. The market will never correct when you want it to. Don’t let your money gather dust in the “safety” of fixed income.

How should a newbie invest a lump sum into equity? Now consider the numbers in the question above. The person has no equity allocation, has 40 Lakhs in fixed income and wants to put 60 lakhs in equity MFs and stocks from a savings account.

This is unlikely to happen to most of us, but imagine a newbie who has just received a large bonus with equity exposure. What should she do?

I would recommend putting the entire sum in a short-term FD or a liquid fund, or a mixture of the two. Start a SIP from their income and get used to market volatility. If the lump sum is Rs. one lakh and the SIP is Rs. 10,000, they should notice weekly or monthly gains or losses and project it for an investment of Rs. 25K, or 35K. After a few months, they can gradually start investing the lump sum over a few months.

If you want this lump sum to get you closer to your desired asset allocation, then it is okay to do this over a year or three, especially when you do not have experience.

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