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How to convert your lump sum money into a quasi MF SIP

14 Jul 2023

Over the last many years we have all been hearing the merits of systematic investing. Yes, it does give us the benefit of phased investing and also gives us the added benefit of rupee cost averaging. As a result, your average cost of acquisition is lower than what it would have been in case of a lump-sum investment. All that sounds absolutely fine if you are planning your SIP in an equity fund; You can use a SIP calculator to estimate your average cost of acquisition and see how it compares to a lump-sum investment. This can help you decide whether a SIP is the right investment strategy for you and in that case you are likely to end up beating the Nifty and the Sensex over the longer run. However, what happens if you receive a lump-sum payment. Say, you have received the redemption proceeds of your PF on shifting your job or one of your endowment policies has just matured. That is a lump-sum inflow. How do you handle this lump-sum productively? There are 4 approaches to do it..

Forget the hassles and go for a lump-sum investment..
This is the simplest way to do it and you can just go in and allocate your lump-sum in one go into a portfolio of stocks. While that would be quite simple, it is not the most scientific way of allocating your lump-sum money. It is very likely that you are buying the wrong stocks at the peak and the down-cycle in these stocks will mean that you are likely to be sitting on notional losses for a long time. This also hampers your liquidity as you are not able to capitalize on other opportunities as they come by. Also your money is idling in those stocks and not earning anything.

A more improved version is to wait for the right moment..
That is easier said than done. How do you define the right moment? You keep your money in a bank and wait to enter when the right opportunity approaches. But it is practically impossible to catch tops and bottoms in the stock market. You may end up waiting for too long; something that we have seen in the last 3 years when markets have been moving upwards relentlessly. Also your money in a bank account will hardly earn anything which still means that you are not putting your money to productive use.

Keep the money in a bank and allocating into a SIP each month..
That is slightly more scientific as you are earning some returns on your idle money and at the same time getting the benefits of rupee cost averaging. Since you are now doing a step-by-step SIP, your average cost of acquisition will come down over a period of time and that will be instrumental in improving your eventual yield on your equity investment. But there is still a drawback. Firstly, your bank account is still paying very low to no interest on your deposit. Secondly, you are just breaking up a lump-sum and investing in tranches which is not the smartest thing to do.

How about the smartest choice of an STP?
Actually, the smartest plan for this scenario will be a systematic transfer plan (STP). An STP is a rule based transfer from one fund to another. Let us say you have just received a lump-sum of Rs.5 lakhs and you want to convert into a 50-month SIP of Rs.10,000 each. What you can do is to invest the entire money in debt funds. In fact, you can be a little smarter. Since only 1/5th of the money will be required in the first year, you can transfer 40% to a 1 year MIP and 40% to a debt fund which will yield higher returns. Then the STP can worked out in such a way that Rs.10,000 of dividends is paid out as dividend by the liquid fund for the money which is swept into the equity SIP. This matrix of transactions will ensure 3 things. Firstly, you have liquidity for the SIP in the form of a liquid fund which is anyways earning more than your bank savings account. Secondly, the MIP and debt fund will mature over the next 2 years and that will give enough time for you to realize higher returns and sweep them into liquid funds. Of course, there will be the cost of sweeping from your debt fund into your liquid fund in the form of exit load but the higher yields will justify this cost.

What we are doing in this case is that we are converting a lump-sum investment into a quasi-SIP by linking it with a STP on a liquid fund. On the one hand the investor earns higher returns on the debt and liquid funds and at the same time sweeps them into equities with zero exit costs. This is an example of combining the best merits of the security of debt and the returns of equity to get a high end hybrid product. The next time you get a lump-sum inflow, a STP could be the right product for you!

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