How to invest lump sum in equity mutual fund
The recent win of BJP in assembly elections held in Gujarat and Himachal Pradesh has boosted the confidence of bulls in the market and major equity indices are once again north bounded. The equity market may continue its upward journey and if you are waiting on sidelines with a bag load of money to invest, what should you do? Should you invest in a lump sum or follow the most advertised way of investing, that is through systematic investment plan (SIP). Both have their own pros and cons. If you invest in a lump sum at one go and market tanks, you may suffer higher losses compared to if you have invested through SIP. Nevertheless, if the market gains further, you may miss some part of the rally.
Another way of investing your lump sum is through 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 lump sum in some liquid fund and switch it to 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 problem with this. First, any gain made in debt funds will be taxed and it creates an extra hassle for the investor. Second, it will not help you to capture the entire rise in the equity market.
Hence, what should be your strategy while investing your lump sum amount? If you are novice investor and do not understand the equity market, STP may be the ideal way, as your investment is automated and market movement does not impact your investment decision.
However, if you are an experienced investor and have a fair degree of understanding about the direction of the equity market, a lump sum is the right approach for you. With better access to technology making online investment has become easy, you can split your lump sum into four equal parts and invest within one month. You can even use technical analysis to time your investment.