How to invest lumpsum in equity mutual fund?
Should you invest in lumpsum or follow the most advertised way of investing i.e. via a systematic investment plan (SIP)? Both systems of investing have their own pros & cons. Suppose, if you invest a lumpsum and the market tanks, you may suffer higher losses compared to the case where you would have invested via SIP. Nevertheless, if the market gains further, you may miss some part of the rally.
The reason why rupee cost averaging or SIP investment is preferred is that the same rupee amount is used in the purchase of fund units at regular intervals. For example, you might purchase Rs 5,000 worth of units every month. When the prices are low, your Rs 5,000 will purchase more units than when they are high; so, your portfolio becomes over-weighted with low-priced shares. If you would have purchased all your units in one go, you may run the risk of paying the highest price for all of them and losing money as the prices returned to more normal levels.
What if you have a large amount to invest today i.e. when the equity market is trading at an all-time high? Rupee cost averaging would urge you to invest it gradually over a period of years. What do you do with your uninvested assets while waiting for their turn? If you want to invest lumpsum, the best way is to go through a systematic transfer plan (STP). Under this process, you give consent to a mutual fund to periodically transfer a certain amount or certain units from one scheme and invest in another scheme of the same mutual fund house. Usually, you park your lumpsum in some liquid fund and switch it to the equity fund. In this way, you invest in equities systematically and at the same time, you get the benefit of returns from the liquid fund. However, there are a couple of problems with this. Firstly, any gain made in debt funds will be taxed and it creates an extra hassle for the investor. Secondly, it will not help you to capture the entire rise in the equity market.
Another popular method for avoiding the major market downturn is the use of moving averages. These techniques use a straightforward mathematical calculation of market data to ‘smooth out’ short-term fluctuations so that underlying trends can be seen more clearly. So, if you are using exponential smoothing on Nifty 50, when Nifty is above the trend that is above the 50-day exponential moving average, it is believed to be a good time to be in equity. Conversely, if the market is below its moving average, it is best to be in money markets. So, you can time the market by following a simple moving average and can take the decision of either to invest lumpsum or via SIP.
However, if you are an experienced investor and have a fair degree of understanding the directions of the equity market, lumpsum is the right approach for you. With technology getting advanced and making online investment easy, you can split your lumpsum into four equal parts and invest within one month.