While investing a large sum, try to diversify your portfolio as much as possible.
Investing a lump sum in stock markets is always a difficult decision. The concern that most have: What if the savings are lost?
For investing a lump sum, follow a definite strategy. Let us take the example of a 35-year-old with a corpus of Rs 5 lakh. He has three options. He can invest the amount in stocks, mutual funds, or a mix of both.
Investing a large sum in stocks: The first thing any wealth manager will suggest is investing in a staggered manner. Putting the entire amount at one go can sometimes hurt. So, go for the right stocks and then, start investing in parts.
Rishi Nathany, a certified financial planner, says, “Given that the result season is round the corner, I will invest the person’s money in the next couple of weeks, ideally, at a 60-40 or 50-50 ratio in large-cap and mid-cap stocks, depending on the risk-profile.”
The risky part of the equity portfolio can be 10-30 per cent (Rs 50,000- Rs 1.5 lakh), that can be used to play the market. “There is a strategic part of the portfolio, where the money would earn long-term returns. There is also a tactical part that can be used to play the market,” added Nathany.
While the long-term or strategic part should be held for a minimum of three years, the tactical part can used to make a quick buck. Depending on the market situation, the churning rate can be modelled. However, one needs to remember that there is a 15 per cent short-term capital gains tax (for less than a year) for each transaction.
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Investing a large sum in mutual funds: The simplest way to get the stock market experience and something that is preferred by financial planners. But since the amount is big, it is important to diversify this portfolio as well.
“One should look at the time horizon first,” said a financial planner. “It is important to know when you would need the money and have an investment plan accordingly.”
If you had a windfall and you are not in need of the money in the next 5-10 years, then opt for equity-diversified schemes. But if you need the money in less than 2 years, go for debt-oriented hybrid funds. If the time horizon is less than a year, go for debt funds because the safety of the principal amount with real returns (returns minus inflation) should be the main objective.
Another way of going about it is investing 50 per cent of the amount in equity diversified funds. The rest can be invested through a systematic transfer plan (STP). Invest 50 per cent in a liquid-plus scheme and transfer the money over time to equity schemes. One could opt for STP over a period of 6 months to 1 year, in 6-12 installments. Experts say, STP works best when markets have peaked or there is uncertainty about the future uptrend in the market.
A mix of stocks and mutual funds: Allocate more money to mutual funds than equities. “Break the Rs 5 lakh corpus up at 2:3,” said Govind Pathak, director, Acorn Wealth.
For investments in stocks, experts advice picking not more than ten bluechip large-cap stocks that would form the core of the portfolio.
“Those who have a high risk appetite can invest in a couple of mid-cap counters but only after a thorough research,” said Balakrishnan Venkatramani, a financial planner.
That is because mid- and small-cap stocks are risky propositions as they outperform the Sensex or the Nifty in a rising market. But they fall faster than the broader indices as well. This is because they are high beta stocks.
For the Rs 3 lakh to be invested in mutual funds, experts advice well diversified equity funds. “Equity diversified funds, which give an alpha over the Sensex are the best bet, right now,” said Pathak. This could either be by way of a systematic transfer plan (STP) or direct investment.
It is important to remember that while investing in a combination of mutual funds and stocks, avoid having exposure to the same sectors or themes. For example, having exposure to an infrastructure fund and stocks can hurt if things go wrong.
Also, don’t be too aggressive while investing, both in mid-cap stocks and funds, as the overall portfolio will become extremely risky. If one invests in mid-cap stocks then do not pick a mid-cap fund. “It is advisable to be aggressive with equities and conservative with mutual funds,” said Pathak.