How to handle lumpsum investment in equity mutual funds?

Jul 15, 2019

I’m currently aged 31 . I want to invest 50 lakhs lumpsum in equity mutual funds from retirement perspective for 15-20 years . However , I am unable to determine the appropriate method of investment among the below considering that I have moderate risk appetite . Please suggest.

  1. One time lumpsum into well diversified funds
  2. STP over 4-5 years
  3. Monthly SIP using the interest earned on lumpsum from FDs
1 Answer
Jul 15, 2019

Prabhu - you have a great question.  And I am sure that a lot of people would love to have this problem - of having 50 lacs to invest in one go!

I would first give a theoretical response.  Pattabiraman Murari of freefincal did a long backtesting of 'STP' - though it was for upto 15 months.  The study is here

The summary of the test:  "The essential point is there is no directionality. Sometimes one works, sometimes the other and sometimes no difference. It all depends on the future sequence of returns."  

To give an example, if you have invested lumpsum in 2008, your experience would be way different if you invested in Jan 2008 vs Dec 2008! In hindsight, a lumpsum investment in Dec 2008 would have been one of the best investments ever made.

A version of the analysis for 'market highs' is here.

Now the practical suggestion: 

  • Interest from FD is not advisable at all - the corpus would be mostly in FD even after many years, which is against what you want to do.
  • STP as such is good for the AMCs.  You can do the 'gradual transfer' manually also.
  • There is not enough data to favour STP vs lump sum.
  • For peace of mind, do the shift over a few months - max 6 quarters, and be done with it.

The Summary of the second quoted article is quite apt:

If the market is at an all-time high and if you have a lump sum, then invest it over a few months and be done with it. This is for your peace of mind. There is no evidence to suggest that gradual investing is better than one-shot investing at all-time highs or at any other time. Please do not assume what appears as common sense to you, will find quantitative support.

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