It’s The Strategy That Counts!

Considering that there is an inverse relationship between interest rate and bond prices, choosing a wrong category of fund can either make a dent in your returns or expose you to the volatility risk.
 

There can be occasions when you may have a large sum of money to invest. Usually, there are two important decisions to be taken in such a situation i.e. which asset class to invest in and how to invest this amount. After a decision is made about where to invest, many of us often face the dilemma of how to invest this money i.e. whether to invest as a lump sum or invest in a systematic manner or as a combination of both. One of the key factors that can help you make a sensible decision is your time horizon and investment objective.
 

For example, if you are looking to park your money in options like liquid, low duration, ultra-short-term or even arbitrage funds, lump sum investing would be apt. Similarly, if you decide to invest in a Debt Fund as a part of asset allocation, a lump sum investment can fit the bill. Of course, the key would be to choose the right category of fund(s) depending on at what stage of the interest rate cycle the decision is being made. Considering that there is an inverse relationship between interest rate and bond prices, choosing a wrong category of fund can either make a dent in your returns or expose you to the volatility risk.
 

Investing in Hybrid Funds can be a little tricky as different categories of hybrid funds have different levels of asset mix i.e. equity, debt, arbitrage, gold and international exposure. To begin with, there are conservative debt-oriented hybrid funds, wherein equity exposure is restricted to 10-25 per cent. If the intention is to invest in these funds for a time horizon of 3-5 years or more, you can invest at one go. Then, there are equity savings funds wherein equity exposure is usually around 20-25 per cent and the rest is invested in arbitrage and debt instruments. If the time horizon is around five years, you can consider investing as a lump sum.
 

If you are a first time investor and looking to invest in hybrid funds like balanced advantage and aggressive hybrid funds where equity exposure is much higher, a combination of lump sum and systematic investment can be ideal. It’s important to reduce the impact of volatility on the portfolio at the initial stage of your investment process so that it doesn’t get derailed. Of course, experienced investors looking to invest in these funds as a part of asset allocation, with a clearly defined longer term time horizon, can opt for lump sum investment.

As for investing in pure equity funds, usually a combination of lump sum and systematic investing gets you the best results over the longer term. In a current market like situation, investing in a combination of 30-40 per cent as a lump sum and the remaining through STP over the next 3-6 months can help you avoid timing the market. However, a thumb rule doesn’t always get you the best results. Therefore, you must consider your own personal situation before making a decision.
 

It is important to consider your risk profile, frequency of lump sum investing and the quantum of the proposed lump sum investment vis-a vis your overall portfolio size. Besides, if you are investing in equity funds through SIP and you have a lump sum to invest, the key would be to consider its proportion to how much is being invested through SIP in a year. In a situation like this, if lump sum investment is say up to 40-50 per cent of your annual SIP amount, it wouldn’t be a bad idea to invest the entire amount at one go. As is evident, a rational investment decision on whether to invest lump sum or not should be based on the chosen asset class and existing investment strategy.