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Face irregular cashflows? Invest lump-sums in mutual funds by following these steps

While SIPs hog all the limelight, they are not the only means to investing in mutual funds. You can always invest lump-sums as well

December 07, 2021 / 10:29 AM IST

Recently, I was talking to a friend of mine. His cashflows are irregular due to the nature of his family business. He told me that even though he understood the benefits of SIP, he didn’t have the regular cashflows to match SIP schedules. He wanted to know when and how he could invest lump-sums in equity funds.

While SIPs hog all the limelight, they are not the only means to investing in mutual funds. You can always invest lump-sums as well. The primary reason why lump-sums aren’t discussed much is that most people generally don’t have a lot of spare money. Most often than not, people get some spare money in the form of an annual bonus or performance incentive, or from the sale of some assets, etc. Or, as in case of my friend, his irregular business income provides for the occasional spike in surplus money he has and that can be invested.

Is there a right time, then, to invest lump-sum amounts?

Timing lump-sum investments

It is simple. Mathematically speaking, a lump-sum works best during rising bull markets. If you are able to enter the markets near the lowest point (let’s say, you were brave enough to invest during the March 2020 crash), then you would be sitting on huge profits as of now.

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But as simple as it sounds, it’s not easy, at all.

When you invest a lump-sum, you run the risk of being completely wrong by mistiming the entry. And that is the core problem with this approach. On the brighter side, if you get your timing right and can wait long enough, then you can potentially make higher-than-average returns.

It is for this additional timing risk that small retail investors are advised to refrain from investing large amounts in one go.

How to invest lump-sums in equity funds

-If investing for 0-3 years, then don’t invest in equity funds. Simply invest the lump-sum in debt funds. Do not try to time the equity markets to make super profits in the short term. It might work. It might not. For most people, it’s not worth the risk. Small amounts are still fine. But don’t play this bet with large lump-sum.

-If investing for five-plus years, the answer will depend on your risk appetite (conservative, balanced or aggressive). You can invest the lump-sum in debt funds and then systematically transfer it via STP into equity funds over 6-12 months. There are certain risks associated with investing a lump-sum in mutual funds. Doing a gradual STP reduces that risk to a large extent.

-But what if you want to invest for the long-term, say, 7-10 years or even more (like for retirement)? In this case, if you have a small lump-sum, go ahead and invest it in a few tranches and be done with it. But if you have a large lump-sum, then once again use the STP route to average over 6-18 months.

-Quite often, equity markets correct. A 10 percent correction is common. A 20 percent or more decline is comparatively rare. So, if markets have corrected a bit more than normal in the recent past, divide the lump-sum and invest in tranches at different (and hopefully lower) market levels. This sounds like trying to time the market. That’s fine. If you have lump-sum, the market corrects and your time horizon is long, then go ahead and do it. It will help push up your long-term returns.

-Finally, if you are a self-employed professional or businessman (like my friend) with irregular income, then use your occasional cashflows to park lump-sums in debt funds first. And then, use Systematic Transfer Plans (or STP) to transfer a fixed amount periodically into your chosen equity funds. That way, you can create a sort of artificial regularity and do systematic investing in equity funds.
Dev Ashish The writer is the founder of StableInvestor.com
first published: Dec 7, 2021 10:29 am

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