“I have got Rs 2 lacs to invest. How should I invest?” I get similar questions very often in e-mails or comments section. In this post, I will not delve into products you should be investing in. That depends on many parameters including but not limited to your goals, risk appetite, risk taking ability, cash flows and existing assets and liabilities. I trust you to figure this out.
The question I will try to answer is how you should invest the amount. Should you invest the amount lump sum or should you spread this investment over a few weeks, months or years? What should you do? I will limit my discussion to mutual funds.
What if you had to invest in a debt fund?
If you need this money in the short term, don’t think much. Put the money in a liquid, ultra-short term and a short term debt fund.
In fact, if you have to invest in debt funds for any reason (say, asset allocation etc), invest lump sum.
With any debt product (and not just debt mutual funds), invest the amount at one go.
What if you had to invest in an equity fund?
This can get tricky. What if you invest lump sum and markets move downwards thereafter? Should you invest in a different manner?
You have three options:
- Invest the amount lump sum (at one go) at the current market level.
- Put the money in a savings account and start SIP for a fixed period. Alternatively, you can put the money in a liquid fund and start a STP into an equity fund. Under STP (systematic transfer plan), a few units will get liquidated in the liquid fund on a specific date each month and get invested in an equity fund from the same fund house.
- Put the money in savings account or liquid fund and invest in an opportunistic manner (at one go and over multiple installments).
Do note risk of investing in equity markets is same irrespective of mode of your investment (lump sum, SIP or STP). By not making a lump sum investment (and taking SIP or STP route), you merely avoid putting the entire amount at one level.
You can incur losses in equity markets irrespective of the mode you choose to invest through.
When would you invest lump sum?
You first need to figure out a threshold beyond which you will not invest lump sum (at one go).
The threshold can be based on many parameters. I will only list down a few.
- A percentage or multiple of your monthly income. Example: You will not invest lump sum if the amount is greater than your 2 month salary.
- A percentage or multiple of your monthly investments or savings. Example: You will not invest lump sum if the amount is greater than 6 times your monthly investment
- A percentage of your overall investment portfolio. Example: You will invest lump sum if the amount is less than say 5% of your portfolio.
There is no formula to find the threshold amount but I am sure all of us have some benchmarks to decide the level.
An aggressive investor may not mind investing even 15% of his portfolio at one go. On the other hand, a conservative investor may just not invest lump sum. Depends on your risk appetite.
Also, consider your risk taking ability for this very investment.
For instance, let’s assume your annual income is Rs 15 lacs and have a portfolio of Rs 40 lacs. You invest Rs 6 lacs per annum. You receive a windfall of Rs 3 crores from the sale of a property. You want to invest the amount in equity funds. In such a case, it is not advisable to avoid lump sum investment in equity funds. Rs 3 crore is way beyond any threshold criterion that you may apply.
If you mess up this investment, you may simply not be able to recover from this kind of loss. The amount is 50 times your annual investment and 7 times your total portfolio.
It is better to split the amount and spread over a few months or years.
What will you do?
Let assume you have an amount which is beyond YOUR threshold and you do not want to invest lump sum. Which option will you choose? Option 2 or Option 3?
To be honest, neither is better than the other. Choice depends on your comfort level.
From what I have seen, new investors are comfortable with the second approach because the investment is automated through a STP and market movements do not affect their decisions. Part of the credit also goes to smart media campaigns where systematic investments (especially SIP) have been projected as “You cannot go wrong” approach.
Do not get me wrong. I make bulk of my MF investments through SIPs. In my opinion, SIP is the best way to invest for retail investors.
Third approach is suited to disciplined investors. If you are an experienced investor and have a view on markets, then the third approach suits you the best. If you feel the markets are overvalued at the moment, you can wait to invest till the market valuations become reasonable. You can also use technical outlook to make such investments.
Alternatively, if you think that the markets are undervalued (or are at a strong support level), you can simply employ the first approach i.e. invest the entire amount at current levels.
By the way, in our country, everyone has a view on market. I am talking about those who have the skills and time to form a rational view on markets. Do you have such skills? Well, you are the best judge.
What do I do (for my portfolio)?
I always prefer the third approach. For any amount that I have to invest in equity funds outside of my SIPs, I use the third approach.
So, my threshold is quite low at 1-month investment.
I put the amount in a liquid fund or an ultra short term debt fund and look for lower levels to invest.
If I feel the markets have been beaten down badly when I get the funds, I may invest the entire amount at one go (first approach).
How much time do I give myself to invest?
I do not put a timeframe for investing. I use such corpus in an opportunistic manner. I am willing to wait for months or may be even years (not sure of this). It is a tricky approach. In a sustained uptrend, you may simply keep waiting and miss the entire up movement. Moreover, emotions may play a part. Even when the markets have gone down, you may simply keep waiting for even lower levels.
I cannot do anything about the first issue where markets simply keep going up. However, about the second issue, my levels of investment are pre-decided. I make note of levels (at least mentally) where and how I would invest. And I stick to the discipline. I break down the amount in a number of installments (with each installment at least as much as my 1-month SIP investment).
For instance, if I had lump sum of Rs 6 lacs to invest, I will invest Rs 2 lacs at say Nifty level of 8,000, another Rs 2 lacs at Nifty level of 7,500 and the remaining at 7,000. At the moment, Nifty is hovering between 8,500 and 8,700.
I run the risk that these levels may never come but I am fine with it. I am willing to wait. I will earn some returns on my liquid fund investment. Keep in mind I have my SIPs running.
Please understand this is just an approach I am comfortable with. I am not saying this is the best approach. In fact, many may consider it a foolish approach. So be it. Remember personal finance is personal.
You may put a time frame for making such investment. For instance, if you do not find good levels to invest in the next six months, you can invest the entire amount after six months or may shift your investment levels.
There is no right or wrong way. It depends on what you are comfortable with.
For instance, the simplest is the asset allocation approach. Under the approach, you invest the entire amount at current levels in equity and debt funds of choice. And you are done. The breakup between equity and debt funds shall be line with the desired asset allocation.
How do you invest lump sum amount in mutual funds? Please let me know in the comments section.