Investing Hack_How to SIP a lump sum
You are an SIP investor. But you now have a lump sum to invest. What do you do?
Risk v Return
Fixed income options such as FDs are safe for lump sums but the returns are low
Equity mutual funds can deliver great returns, but investing a lump sum is risky.
How can you get a good mix of reasonable returns, safety and liquidity when it comes to investing a lump sum?
How to balance risk and return
Step 1: Invest the lump sum in a good debt mutual fund. Liquid funds are among the safest debt funds, and deliver 6-9% returns
Step 2: Use a systematic transfer plan (STP) to move funds every month into an equity mutual fund.
Assume you have Rs 100,000. Put the entire amount in a liquid fund
Move Rs 10,000 every month over the next ten months via STP to an equity mutual fund
Such a strategy allows you to benefit from the greater return of equity without the risks associated with investing a lump sum in the markets.
Points to remember
Choose a liquid fund that invests in highly rated paper to minimize risk
Some liquid funds have an exit load of around .5% for redemptions within a month
Arbitrage funds are an alternative to liquid funds and are more tax efficient since they are treated as equity funds.
How to execute the plan
If you are using STP to move your money between schemes of the same mutual fund house, issue standing instructions at the start and it will get done automatically.
But if you are moving money between schemes of different fund houses, you will have to choose a systematic withdrawal plan. The liquid fund will credit your bank account every month with a fixed amount; and you will have to credit the amount to the equity fund through post-dated cheques or standing instructions or ECS.
You can choose a weekly, monthly or quarterly transfer. Most prefer a monthly option.