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

Published: November 4, 2017 at 10:31 am

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“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.

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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 guarantee 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.

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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 an 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?

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  1. Do you have any stat that spending the lump sum within a month works better than spending it over 6months to a year over last 10/ 20 year sensex data?

    1. No. Not hard to get, but I see no point in such a comparison as the bulk of the risk lies after your the investment is over.

  2. Sir,
    STPs dont cost investors anything (like paying a commission). So its not right to term it as just a business strategy by AMCs. Also when its amply clear that markets are at all time high and you yourself talk so much about asset allocation, its certainly prudent for an investor to invest in chunks.
    STP can help automate it if you want to do it over 3 months or so and why not? Market went to 9700 twice in the last 3 months.
    When market is at 7500, its a different market altogether and you would probably be advising people to stay invested allaying their fears rather than asset allocation talk. Lumpsum makes lot more sense there as compared to STP.

  3. I’ve around 100L (1CR) to invest. For me this is not only a lump sum but a life changing lump sum.
    It can cover my entire retirement if it grows at 10%. I’m forty now.
    I’m planning to spread my investment over next 36~40 months, so that I can cover some of the election volatility.

    What would you do in this situation?

    1. What would you do in this situation? —-> Have an asset allocation in pace and not invest the whole thing in equity. Sure, I might stagger my equity investment, but not over that long a time.

  4. I didnt say asset allocation is something to do with market highs. I just said market highs and lows will prompt you to rebalance your portfolio (asset allocation) by selling or buying into equity.
    So that way if you have lumpsum and market is at all time high, why would you be buying at one go when you actually need to sell some of your existing holdings to rebalance?
    Vice-versa case on market lows.

  5. If I could peak into your mind, what would YOUR asset allocate be in such a case? Just what to remind you of a constraint for this little thought experiment – this is a retirement ONLY portfolio (other things already taken care of, education, primary house etc)

    50% Real estate, 50% Equity (balanced funds), Or
    40% Real estate 50% Equity (balanced funds) 10% Gold, Or
    50% Equity (balanced funds) 50% USD invested in NASDAQ index Or
    50% Land, 30% Equity, 20% GOLD … so many options

    What would you do?

    Really appreciate your effort, your blog has really helped me.

    1. I will not think about asset allocation first. Would first find out how long the retirement portfolio can be used to fight inflation. Only then worry about asset allocation. Try my robo template.

  6. Well… by investing in one shot, you are just increasing that risk and nothing else. I think this article is inspired by long bull run in the market. Please note that I am fan of your blog but could not agree with your this viewpoint.

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