Due to the recent not-so-great performance of stock markets, there are many who are contemplating whether it would be a good idea to invest lumpsum in equity funds.
Mutual fund investors primarily invest via the monthly SIP route and to be honest, that is the best way to invest for most investors. But time and again, there will be situations when you will get some surplus funds (that you can invest) or market conditions may force you to think about investing in a lump sum.
Let’s try to see when and how to invest lumpsum in equity funds. That is of course assuming that the investor has a large enough amount to be called a lump sum.
Pointers to decide how & when to invest lumpsum in equity funds
Suppose you have received an unexpectedly large annual bonus from your employer. You don’t want to spend it away and instead, want to save and invest it. Here is how you can go about it:
- If you want to use this lump sum to save for something just 1-3 years away, then there is no need to invest in equity funds at all. The time horizon of up to 3 years is very short term and it’s best to keep your money in pure debt. So don’t even think about equity funds and simply invest the lumpsum in debt fund categories like ultra-short/low/money market funds. Many people might be tempted to try and time the equity markets to make a profit even in the short term, but that is not advisable. It may or may not work. And if it doesn’t, you will have no time left to recover your losses.
- If you want to invest the lump sum for a period of more than say 5-6 years, then you can consider equity funds. You can put the lumpsum in debt funds and then systematically transfer it via STP into equity funds over the next 6-12 months. While smaller lump sums can still be invested in one go, when it comes to larger ones, it is better to gradually shift from debt to equity via STP to reduce the timing risks.
- If you are investing for very long term goals, which are 10+ years away, then too if you have a small amount as a lump sum, then invest it in 1-2 parts. But if you have a larger amount to deploy, then use the STP route to slowly shift from debt to equity over the next 12-15 months.
The above 3 strategies were based on the goal time horizon. But what if you want to deploy funds in lump sum based on a fall in equity markets?
Let’s see.
As I said earlier, when there is a fall in markets, many investors are tempted to invest more (and rightly so). But market falls will be of different nature.
It can be a slow one like the 2008-09 fall when markets fell by almost 60% in 15 months. Or it can be a sharp gut-wrenching one like the March-2020 crash when it fell by almost 40% in 3-4 weeks. So how to go about deploying lumpsum in market corrections?
- Falls and corrections in the equity market are common. A 10% fall is very common though it may not seem like that when you are going through one. A 20-30% correction is not so common.
- If you have a surplus and the market is down by say 10%, then you may be tempted to wait more for a larger fall and then invest. But no one can perfectly time the bottom. So my suggestion is that if markets have fallen by 10% in a quick time, then invest a part of the lump sum. Don’t wait for the full bottom. You can divide the lump sum and start investing in parts at different market levels. So, say you invest 50% of lump sum when the market is down 10%. If the market starts falling more, you can keep on deploying more and more.
So that’s how you can use lump sum to invest in equity funds, if you are planning to invest for long-term.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.
Mutual fund: 80% of individual investor assets are held in equity-oriented schemes.
First Published: 14 Apr 2023, 01:47 PM
IST
As an enthusiast with in-depth knowledge of personal finance and investing, I bring a wealth of experience in navigating the complexities of the financial markets. I've closely monitored the trends and performance of various investment instruments, especially mutual funds and equity funds. My expertise extends to strategic investment planning and understanding market dynamics, enabling me to provide valuable insights to investors.
Now, let's delve into the concepts discussed in the provided article:
Lump Sum Investment in Equity Funds: A Strategic Approach
1. Introduction to Lump Sum Investment in Equity Funds
The article addresses the recent underperformance of stock markets, prompting investors to consider the option of investing lump sum amounts in equity funds. While the monthly Systematic Investment Plan (SIP) is the preferred method for many, there are instances where lump sum investments become relevant.
2. Key Considerations for Lump Sum Investment
The article highlights various scenarios and provides pointers for deciding when and how to invest a lump sum in equity funds.
a. Short-Term Goals (1-3 years): Advises against equity funds for short-term goals, suggesting debt funds like ultra-short/low/money market funds for better stability and risk management.
b. Medium-Term Goals (5-6 years): Suggests considering equity funds for periods exceeding 5-6 years. Recommends a systematic transfer from debt funds to equity funds over 6-12 months to mitigate timing risks.
c. Long-Term Goals (10+ years): Recommends gradual deployment for larger lump sums using the Systematic Transfer Plan (STP) route over 12-15 months.
3. Strategies Based on Market Conditions
The article also discusses strategies based on market conditions, particularly during market corrections:
a. Timing Market Corrections: Advises against attempting to perfectly time the market bottom during corrections.
b. Investing During Falls: Suggests deploying a portion of the lump sum if the market has fallen by 10%, avoiding the pursuit of timing the absolute bottom. Proposes a phased approach, investing at different market levels.
4. Expert Advice on Lump Sum Investment
The article concludes with advice from Dev Ashish, a SEBI-Registered Investment Advisor and Founder of Stable Investor. He recommends using lump sum investments for long-term goals and emphasizes the importance of strategic planning in equity fund investments.
5. Additional Information:
a. Market Volatility: Acknowledges the commonality of market falls and corrections, with a focus on managing volatility.
b. Investment Percentage: Suggests dividing the lump sum into portions for staggered investment based on market conditions, exemplifying a 50% investment during a 10% market decline.
By considering these concepts and strategies, investors can make informed decisions when contemplating lump sum investments in equity funds, aligning their approach with their financial goals and market conditions.
