Investing Hack_How to SIP a lump sum

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.

Example:

• 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.