How to invest large sum when market is at all time high?

We all understand Systematic Investment Plan or SIPs as they are generally know as to invest regularly. But what should we do if we want to invest a large sum and not so sure about the market, for those investors STPs could be the right answer to so as to spread risk over a period of time. Let’s understand it in more details.

Most of us understand SIPs which is the best way to invest in mutual funds especially for those who earn regular income i.e. salary and want to save in a disciplined way. SIPs is a systematic way of investments which works by setting up a regular, fixed investment every month or even could be weekly or quarterly. It gets you a buying price that is averaged over many months or years, which eventually enhances returns. It also protects us from falling market to some extent as SIP ends up buying more units for the same amount of money in falling process. Most importantly, in SIP the monthly or regular installment fits the income pattern that most people have.

However, many times people have lum sum money or they get due to some reason like bonus etc which is not regular but wants to invest that money also but in a much better way. If this money is meant for the long-term ( five years and above) it could be invested in an equity fund all in one go also. However, that carries the risk also, if the markets tank 10-20% soon after the investment we may lose a big chunk of our money and to recover the loss could also be long term affair. In this kind of situation may people would get panicked and redeem the entire sum.

So what could be the solution? 

The solution is simple, but many people are not aware of it, It is called Systematic Transfer Plan or STP, which effectively provides the same potential for higher returns and lower risk as SIPs do, but for onetime investments. The STP is a regular transfer of money from one fund to another. It's like an SIP but the source of the money, instead of being from our Bank Account, is another mutual fund.

So how is it better than lum sum investment?

In STP, initially the money is invested in debt funds i.e. Liquid/Ultra short term funds which have lowest risk and stable returns, and non-volatile. For example. Let's say we got Rs.20 lakh which we would like to invest in an equity fund. This could be an asset sales or bonus from an employer etc.  If we are investing the entire sum at one go, we are exposing the entire investment to any sudden decline in equity markets. Therefore, what we should do is to choose the equity fund(s) and then, choose a liquid/ultra short-term debt fund from the same mutual fund company. First we should invest the entire sum in the debt fund, and then instruct the fund company to transfer say, Rs. 1 lakh into the chosen equity fund every month. In 20 or 21 instalments (not 20, as the debt fund will also add some returns), all the money would have shifted to the equity fund. The buying price would be the average of that time period, thus insulating us from market fluctuations.

However we should always remember that STPs, like SIPs, are not foolproof. If we look back at the markets over the last 10-15 years, we will understand that while an STP generally helps one avoid a market peak and average costs, they're not a foolproof device. In a situation like 2003-2008 when markets keep rising for many years, and then fall sharply, then even an STP cannot eliminate losses. As we all know equity is volatile asset class and there's no way of doing away all risks. However, based on what has happened over the last two decades in India, stretching an investment over one to three years is likely to capture enough of a market cycle to significantly reduce risk.

How should we decide the period for STP?

That should depend on how significant is the sum of money in our overall assets. For example, If the money is  proceeds of a property sale on which some major future plan depends, then three- four years would be appropriate. On the other hand, if it's a bonus worth a few months' income, then maybe six months to one year is enough. There's no fix rule on period and it depends on what we feel is the risk.

To conclude, like SIP, STP can also help us to average out the risk which is inbuilt in the equity market. AS we all know equity market does not works in a simple line, it has short term and long term volatility based on may internal (micro) as well as external (macro) reasons. We can use different strategies to average out the risk however at the end of the day, So be ready for surprises by the market also.