Many readers ask, “Where should I invest a lump sum before deploying it into equity MFs?”. They research the best product for holding this lump sum, how long they should wait to start investing in equity MFs, and how long they should do the transfer.
This is a waste of time, effort and money. You invest in equity only for the long term. Over the long term, details such as when you started investing the lump sum, what instalments you invested in, and for how long will get washed away in the volatility of the markets. Always keep in mind the hypothesis that the markets will fall only after you invest and will rise only after you redeem. So don’t wait on the sidelines!
Also, there is no “averaging benefit” of investing a lump sum slowly. Any such benefit will get dissolved in market noise. Once the entire lump sum is deployed, it will be subject to 100% market risk, which is inevitable!
So, it does not matter where you invest the lump sum before you deploy the money into equity! If you want to keep it in your SB account. Open an FD, fine; invest it in an arbitrage mutual fund or debt fund. Just get on with it, and don’t waste time in the deployment with a 24-month or 36-month plan! Just some amount each week and get it over within a few months – 3,6,9, or, at max, 12 months. And you don’t need a SWP either! Just invest manually! Before that, some planning is necessary.
How to plan a lump sum investment into equity mutual funds
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1: Have you done a goal planning exercise to determine the right equity and fixed income mix for your goals? If you have not, then don’t invest anywhere until you do. You can DIY this with the freefincal robo advisor. If you want professional help, work with a SEBI-registered flat fee-only financial planner from our curated list.
2: Will this amount be associated with single or multiple goals? What is the current asset allocation for each goal if it is the latter? What will the new asset allocation be if I invest the total amount in equity? Is the new asset allocation desirable for each need?
If the lump sum investment into equity skews the asset allocation the wrong way (too much equity for the goal), it would be better to suitably split the investment between equity and fixed income per each goal’s needs.
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 pretty tiny, and the investment can be spread over a few weeks. Large sums can be spread over a few months. 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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