What is the best way to invest a lump sum of money?

One of the best problems to have in life is to have a lump sum of money that you don’t know what to do with. You could have inherited this money, won it in a lottery, or perhaps more likely — earned it over a period of time and never invested it due to inertia.

Obviously, there are many variables that need to be considered before you decide how to go about investing a lump sum amount but there is a framework that you can rely on, and I’m going to write about that today.

Shiv and I did this exercise for a couple of clients recently so I’m relying on the work we did there and generalizing it to fit to a larger audience, but if you feel that I’ve missed taking into account any parameter, please leave a comment, and I’ll respond to it.

How big is your lump sum amount, and do you have enough stashed away for an emergency fund?

How to invest a lump sum?
How to invest a lump sum?

Everyone should have an emergency fund which should be at least six months of your expenses in a savings account or a liquid fund, and if you don’t have one then you need to fund that with your lump sum amount immediately.

What is your asset allocation?

After funding your emergency needs, you should look at your current asset allocation which is broadly categorized as follows:

  1. Real Estate
  2. Debt
  3. Gold
  4. Equity

If you determine that you need to put more money in real estate or debt — you can invest your lump sum amount in your choice of asset in this category at one go since these are relatively less volatile asset classes, and in any case you don’t really have a good option to invest in real estate in a staggered manner.

However, if you determine that you need to invest in gold or equity then you should use a more staggered approach that protects you from market volatility.

Invest in a Debt or Liquid Fund and then use STP to Diversified Equity or Gold Funds

I say that you should use a staggered approach but it would only be fair to mention that this is a matter of opinion and not fact. A lot of people consider investing a big amount all at once better because the equity market tends to go up more often than it goes down, and if you work with that as your guiding principle — it is better to have invested all your money at once, and make it work for you from the very beginning. This Morningstar article illustrates why investing a lump sum at one go can be numerically better than a SIP approach with the help of an example.

That said, I wouldn’t follow this advice with my own money or recommend it to anyone else simply because the risk outweighs the benefit in my opinion. If I invest 20 lakhs in the market tomorrow and it falls by 10% in the next couple of months — it will take me a signficantly longer time to make that amount back than it would take me if I just invested a little every month, and bought more units during the time of market falls.

The most practical way to make this work is to buy a couple of liquid or debt funds, and then start a STP (Systematic Transfer Plan) from them to fund a diversified equity fund, or a gold fund over a period of 18 to 24 months.

This can be easily and cheaply done with the usual trading accounts that most people hold and is one of the best ways to invest a lump sum of money.

23 thoughts on “What is the best way to invest a lump sum of money?”

  1. I had taken bank loan for personal workbut my period of work is extent.Pls u suggest me I have 5 lakh lumpsum amount.want to invest 6 month or 1yr which plan should i choose?

  2. Dear Manshu,

    Greetings and good wishes to you.

    I am 54 and have lump some cash Rs. 25 lakhs. Please suggest an investment avenue where the amount can grow efficiently. I can remain invested for about 7-10 years from now.

    Thanks in advance

    1. you can invest 25 Lakh like this
      Invest 25 Lakh in liquid funds and do STP of 20000 each monthly for 10 years in
      Equity large cap 50 % (10000)
      Equid Mid cap 50 % (10000)
      based on your risk but in long run like 10 year it reduces the risk and return will be good.

      you can increase the STP amount if you are comfortable with STP based on market situation.
      i would suggest to increase the STP amount when the market goes down by 10% or more.

  3. Hello

    I got 60 Lakh after retirement. I am 54 yrs old with no major liabilities as children are financially independent. I have invested 15 lakh in debt mf, 20 lakh in FD on self and wife name separately. 15 lakh in direct equity, 5 lakh in mis mf and 5 lakh in diversified mf.
    Please advise if it is ok else suggest better options. STP and switch can be done with same AMC.

  4. Hello Priya
    If you do not want to take ANY risk, invest it in a BOND GILT fund. GILTs are guaranteed by Govt of India and as such a fund that consists of gilts will be risk free. Choose one with low maintenance expense ration. SBI gilt fund is recommended by MorningStar.

  5. Hi,

    I am planning to invest 10 lakhs in mutual fund. I dont want to take any risk kindly suggest in which fund we can focus.

  6. Hi,

    Thanks for your suggestion to park the money in debt do a STP over 18 months. I have a question here. Suppose say out STP is over. After 18 months, the market crash and down by 30%. we have to wait for minimum 5 years to get back our money and the loss is same. is that right? Thanks.

  7. Hi Manshu,

    time for you to declare this website as ‘dormant’.

    no new articles since may 28

    comments are not replied over a month.

    like a bank account. I declare your blog a ‘dormant’.

  8. (1) Is sec 80 CCD (1B) a part of 80 CCD (1) and hence investments under 80 CCD (1B) limited to the overall limit of 1,50,000 of 80 CCE ?
    (2)Is sec 80 CCD (1B) outside the overall limit of 1,50,000 of 80 CCE (like 80 CCD (2) ?
    NOTE (1) : In SWAMYS income tax book in pg no. 129, example 14, it is illustrated that 80 CCD (1B) is limited to the overall limit of 1,50,000 of 80 CCE .
    NOTE (1) : BUT WHEN ASKED THE TOLL FREE NO. of NPS, they said that sec 80 CCD (1B) outside the overall limit of 1,50,000 of 80 CCE (like 80 CCD (2) ?
    ********************* WHICH IS CORRECT ??? !!!! ????

  9. Thanks Manshu and Shiv.

    what are your opinions on various reputed bonds/ncds traded in cash market on NSE and BSE?
    (eg muthoot fin, India infoline, religare finance, SBI, IFCI, edelweiss?)

    I learnt that for all secured debentures the sebi registered debenture trustee makes sure that the amount collected by company is converted in security and the same is handed over to the trustee through trust deed so at least principal is protected in case of default.

    are there any known defaults on NCDs in last 10 years from NSE / BSE listed ncds?

    if the amount is spread between 20-30 % in 4-5 different NCD brands return can be plus 10% pa

  10. If time horizon is long enough ( 15 years or more ) investing in equity via lumpsum is better, one way to take precaution against situations where markets may fall 10-20% is check the market valuation metrics such as P/E and P/BV if they are at historic ( generally P/E above 20+ is expensive) highs better do a systematic transfer as you have suggested. If the valuations are fair ( P/E levels of 16- 19 ) think you can do STP faster say 6 months. If P/E levels are below long term averages of below 16, one can buy equities for the whole amount.

    This though not fool proof could be a tool,

  11. Dear Manshu,

    The way you share your knowledge with us is truly a noble form of charity. Thank you so much. A few quotes you may like-

    In vain have you acquired knowledge
    if you have not imparted it to others.
    Deuteronomy Rabbah
    (c.900, commentary on the Book of Deuteronomy)

    Share your knowledge.
    It’s a way to achieve immortality.
    Dalai Lama
    (1357-1419, high lama of Tibetan Buddhism)

    If you have knowledge,
    let others light their candles in it.
    Margaret Fuller
    (1810-1850, Journalist, Critic and Women’s Rights Activist)

    A candle loses nothing by lighting another candle.
    Father James Keller
    (1900-1977, Roman Catholic priest)

    Knowledge is like money:
    to be of value it must circulate,
    and in circulating it can increase
    in quantity and, hopefully, in value.
    Louis L’Amour
    (1908-1988, American author)

    Knowledge increases by sharing
    but not by saving.
    Kamari aka Lyrikal
    (*1978, Californian YouTube musician)

    When we know it, you’ll know it…
    (U.S. cable news channel founded in 1980)

  12. Hi Manshu, I am expecting a lump sum amount in near future which I wish to deploy to generate regular income. I agree with you that using STP route to invest lump sum makes more sense. However, 18-24 months STP period looks too stretched. Markets may go down in short term but are likely to be significantly higher in 18-24 months. I guess 6-8 months STP should be enough.

    After investing some portion in Debt MF & forthcoming tax-free bonds, should a person nearing retirement take little risk and allocate a good portion to Equity MF? Markets may go down in short term but can easily beat returns from debt in the long term.

    Many established Equity MF have given 15-20% p.a. returns over past 10yrs and are likely to give similar returns in next decade. Do you think a retiree can generate better regular returns by investing a major portion in eq mf rather than in bank fd/ debt mf etc?

    FT Bluechip declares dividend in jan, FT Prima Plus in feb, ICICI Value Disc in mar, UTI Opp in apr, FT Balanced in may, FT Prima in june etc. Some funds like BNP Pari Div Yield, Tata Bal, L&T Prudence, ICICI Bal Adv declare dividend every month.

    Instead of holding too many funds with dividend option and depending on fund manager for dividend, I guess it will be better to opt for few good funds with growth option and start SWP after 1yr to get tax-free returns. What do you think?


    1. Hi Jason,

      Whether it is 6 – 8 months or 18 – 24 also depends on how big is the lumpsum relative to the investments you already have. The number that I was working with was around 20 to 30 percent and I think in that case it is better to spread it out for a long period. The markets have been quite good in the past five years or so but that just means that the crash when it comes will be as brutal so I would be cautious about that.

      I think retirees need to have money invested in equities because of the high inflation, and negative rate of return debt usually gives. The key is to keep in mind that there have been years when the market has gone done by 30% in the past and that can very well repeat. So, how do you handle that when that repeats? Are you able to wait out the five or more years that may be required to earn that money back, will you be able to take advantage of that crash by switching out some debt with equity? Will you have enough debt and real estate investments such that you won’t be required to dip into your equity investments. These are all questions that need to be considered and managed so that you don’t end up investing more than what you can handle in equity.

      And these are not difficult questions to answer, you can look into your portfolio, think about your expenses, and how your past record with equity has been and you will get a fair sense of how much to invest in equity.

      To the last question, yes I do believe just holding dividend funds, and a lot many of them to stagger return is not a good idea. Better hold growth funds, and withdraw as needed or start a SWP.

  13. but why liquidfunds only I can do post mis of 9 lacs and monthly 6000 can be use as a sip amount because I think the principle of 9 lac is very much safe in a post office than a liquid fund and also there is no variations in interest rates and the amount os also fix for sip for at least 5 years am I correct

    1. Your money is quite safe in liquid funds as well, there’s not really a reason to say one is safer than the other in practical terms. The interest rate is fixed that much is correct.

  14. Would be nice if you wrote a post on how to have the lump sum in the picture also:)
    Anyway great advice. Thanks

Leave a Reply

Your email address will not be published. Required fields are marked *