How should you invest a lumpsum right now?
How to invest a lumpsum during a market correction?
Aditya Nain, Ph.D., is an author, professor, columnist and wealth manager. In this newsletter, he answers questions received from his social media followers.
Aditya manages mutual fund portfolios for over 100 clients in India and NRIs. To schedule a consultation call, please DM him on Instagram or email him at consult@adityanain.com and ask for details.
Q: How to invest a lumpsum during a market fall?
Investing a lump sum in the equity market during a correction can be tricky. To reduce your risk, I suggest this approach: invest 50% as a lump sum and the remaining 50% via a Systematic Transfer Plan (STP) over the next 6 to 12 months.
What is STP?
An STP allows you to gradually shift money automatically from a safe debt fund (for example, an ultra-short duration fund) to an equity fund (for example, a multi cap fund) at regular intervals. This reduces your market-timing risk.
Advantages of this Approach:
No FOMO: Investing 50% upfront as a lumpsum means you benefit IF the market gains.
Rupee Cost Averaging: Because through your STP you’re automatically buying units in equity funds every month at different price points, you’re reducing the impact of market volatility. For example, your equity purchase today could be at a NAV of Rs.100, but if the market falls next month, then you could get units cheaper, at, say, Rs. 95. This allows you to lower your overall purchase price, which is a good thing.
Safety: The money parked in a safe debt fund waiting to be deployed does not go up or down with the stock market. You earn modest FD-like returns while the money slowly gets deployed automatically every month.
No waste: If the money lies in your bank account, it could get wasted on an unnecessary purchase.
How to Implement this strategy
Step 1: Select one equity fund and one ultra short duration fund from the same AMC. For example, the Nippon India Multicap Fund and the Nippon India Ultra Short Duration Fund.
Step 2: Invest 50% in the selected equity fund and 50% in the selected Ultra Short fund.
Step 3: Set up the STP. You will have to select the number of months the STP will go on, the monthly amount that will be transferred from the Ultra Short fund to the equity fund and the date on which the transfer will take place every month.
Example:
If you have ₹10 lakh, invest ₹5 lakh in the Nippon India Multi Cap Fund. The other ₹5 lakh goes into the Nippon India Ultra Short Duration Fund. Start a ₹41,667 monthly STP for the 1st of every month. So for 12 months, every month, ₹41,667 will automatically get transferred from the Ultra Short fund to the Multi Cap fund. At the end of 12 months, your money will all be in the multi cap fund.
Pro-tip: Not all platforms offer STPs. To be sure, you can invest through an AMC website or through the CAMS or Kfintech investor apps.
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Aditya Nain, Ph.D., manages mutual fund portfolios for over 100 clients in India and abroad. To schedule a consultation call, please DM him on Instagram and ask for details.
Disclaimer: This is not financial advice. Please do your own research and consult a SEBI Registered Investment Advisor and/or a CA before making any finance, investment or tax decisions. I am an AMFI registered mutual fund distributor. Mutual funds are subject to market risks. Read all scheme related documents carefully.