Where Do I Invest Lump sum Amount ?

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InvestmentWhen it comes to investing a lump sum amount, what is the first investment option which comes to your mind ? Did we hear the word real estate ? If yes, we won’t be surprised as real estate tends to be the asset class of choice for big chunks of money. After all, if you have Rs. 50 lacs lump sum, have you ever heard any one saying that they invested Rs. 50 lacs in one go into Gold or Equities. There may be a section which may have invested such big amounts into fixed deposits. We tried to think through it, as to why would people like to invest large amounts into Real Estates and ignore a much better asset class such as Equities for this purpose.

Top 5 Incorrect reason for investing Lump Sum in Real Estate

  1. To buy real estate you need big chunks of money. Sadly it is true. The prices of real estate have gone so high that you can’t buy a decent piece of land / flat unless you have truck loads of money. Combined with the fact that high interest rates in India makes it really difficult to afford a big ticket loan and hence the only saving grace is by putting in a big deposit. This big number could be as high as Rs. 50 lacs (INR 5 million) for a small flat in Mumbai. As a result, not many people are lucky enough to step up on to the property ladder and always dream and work towards building up a deposit to buy a property. The moment they have such a chunk, bingo !
  2. Talk of the street – My neighbor invested 50 lacs in a flat and it got doubled in x years. That sounds like a big number gain !! Hence lets invest in real estate with a big ticket investment. Please do not forget that an amount which doubles in 5 years is just 15% return and after tax it may be ~12%. Also check again, the real estate market hasn’t grown in past decade.
  3. Real EstateIf not real estate, where else ? This is the most ridiculous question which we get when discussing about investing large chunks of funds. As if there is no other asset class which is competent enough to accept large blocks fund. You can easily invest into fixed deposits or in Equities (provided you do it the right way). But just because they haven’t heard any of their peers investing more than a lac in one go into Equities, they are not comfortable doing that.
  4. Do not put all eggs in one basket – Diversification is a golden rule of investing. By investing large blocks into real estate, you may be skewing your wealth towards an asset class which is plagued with ownership risk, mal practices of developers and could be illiquid. In many cases it the net worth of individuals could look like 90% in real estate and remaining minor percentage split between Fixed Deposits and Equities. It is a shame that the asset class which has the best potential to provide growth gets the lowest allocation.
  5. I have Cash – Now what ? Well this is where we have no arguments. Real estate tends to be the golden haven for investing untaxed money. Every one knows it, but still it is not curbed. Perhaps this is the one of the major reasons where even in a bear run, Indian real estate markets do not dip. At max, the new sales become zero.

Any Alternatives ?

Obviously yes. We do want to encourage investing in Real estate. But after one, pause and think, are there any other alternatives. If you have time by your side and can invest for over 5 years, a good alternative is Equities. This could be either directly into stocks – choose either from Blue chips or selected good MidCaps OR via Mutual funds. For most of the people, the biggest challenge is to select stocks and to tackle market volatility which is an inherent factor of Equity markets. An excellent tool to invest into Equity markets is using Mutual Funds via a technique called Systematic Transfer Plan or STP. To read more about Mutual Funds, please visit our article What is a Mutual Fund ?

How Can You Use Systematic Transfer Plan For Investing Lumpsum?

Remember – STP is not an investment in itself but a technique to invest your lumpsum. Essentially it means transferring an amount of your investment from one investment to other on a regular basis. The biggest risk of investing lumpsum in Equities is – what if the market crashes soon after you invest your money and takes several months if not years to come back to the same level when you invested your money. Classic example is below. If you invested in NIFTY in between Dec 2007-January 2008, you would have been for a rude shock. The markets sharply crashed from 6250 levels to around 2600 levels in a few months. It was not until November 2010 when the markets came back at the same level of 6250, i.e. zero returns over a period of 3 years ! It was only mid 2014 when the investors starting seeing 10%+ return on their money invested pre-Dec 2007, i.e. over a period 6.5 years ! NIFTY Chart Source- Yahoo Finance

However, the story would have been very different if investors would not have invested lump-sum but would have invested gradually through the correction phase to average out the market correction.   A simulation of investing in an illustrative investment scheme is HDFC Index Fund – NIFTY Plan clearly explains this logic. A lumpsum of Rs. 40,000 invested on 1 Sept 2007 would be worth Rs. 44K on 1 Jan 2011. However, investing similar amount gradually over the period, i.e. Rs. 1000 per month from 1 Nov 2007 till 1 Jan 2011 would have been worth Rs. 53K on 1 Jan 2011, a CAGR of 18.5%.

So How Do you Do It ?

The technique is simple and works in a two step process.

Step 1 : Invest your lumpsum in a low risk investment scheme. This could be a Liquid Fund which will give a fixed return on your lumpsum.

Step 2 : Submit an instruction with the Fund house to transfer a fix amount of investment from your Liquid Fund into a target scheme over a specific number of months / years.

The impact of above would be gradual investment from a low volatility to a higher volatility investment product to smoothen out any market shocks and average them over the investment duration. By investing into a low volatility product gets you a reasonable return of approx 7% annualized till the entire amount is invested. Once your entire money is invested over the duration mentioned in your STP instruction, you can continue to hold the investment till your investment horizon is met.

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One Reply to “Where Do I Invest Lump sum Amount ?”

  1. Chetan Shenoy says:

    A related question that comes to mind is – how can an investor retain a desired asset allocation between equity and debt when in receipt of a lump-sum amount? To illustrate briefly, let’s say an investor maintained an asset allocation of 70:30 (equity:debt) prior to receiving a windfall large sum of money (“large” = approx 40% of total existing investments). Presuming his investment goal is retirement which is approx 15 years away (and therefore currently the desired 70:30 allocation), and he wants to maximise his corpus, what would be the best way to invest this lump-sum amount with minimal implication on his asset allocation? How critical is asset allocation, particularly in such a situation where the lump-sum amount is significant. Presumably he has 2 options a) park the lump-sum in debt with STP to equity and he would return to his desired asset allocation in 4-5 years; b) invest immediately in the same ratio in equity:debt. Appreciate your views.

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