Invest lump sum in aggressive hybrid funds?
“Can I invest a lump sum of Rs 10 lakh in an aggressive hybrid fund, since it is not a pure equity fund?”, asked one of our readers.
Investors often ask this question because they co-relate the importance of SIP and the averaging cost of purchase with equity funds alone. However, it is equally important to not invest a lump sum in equity or equity-oriented funds. For instance, in aggressive hybrid funds. To understand why, let us quickly look at how aggressive hybrid funds work in the first place.
Aggressive hybrid funds or equity-oriented hybrid mutual funds
An aggressive hybrid fund invests in both equity and debt securities. However, their allocation in equity and related instruments is higher (65-80 per cent) than in debt instruments. In other words, they can even be called equity-oriented funds.
Theoretically, the equity-debt combination helps them balance high returns and stability. However, because of their higher asset allocation in equity, they are subject to volatility and market risks.
Understanding the impact of market on aggressive hybrid funds
For instance, this graph illustrates the ten worst one-year rolling returns of the Sensex index and aggressive hybrid Funds. There are two things to notice here.
Firstly, it is evident that aggressive hybrid funds, despite being equity-oriented, have weathered the equity market downturn better due to their debt component. This aspect provides a protective cushion, resulting in smaller losses compared to pure equity funds, like the sensex index fund for instance.
More importantly, this graph indicates how a lump sum investment can suffer from massive losses if it experiences a market fall. In this scenario, if you had invested a lump sum of Rs 1 lakh just a year before March 2020, you would have suffered a 21 per cent loss over the year, leaving you with just Rs 79,000. This is why investing the entire sum at once doesn’t make sense.
The alternative
This is where SIPs step in.
They have the ability to shield your investments from short-term market fluctuations and thus protect you from risk. SIPs ensure that you do not invest a significant sum during a market high and then suffer from a subsequent fall.
When you invest through an SIP, it allows you to invest only a portion of your money, albeit on a regular basis, irrespective of the market conditions. As a result, when market prices are high, fewer units are purchased, and when prices are low, more units are bought.
In the longer run, your investment ends up with an average purchase cost, thus reaping the benefits of a disciplined approach to investing. This is commonly known as ‘rupee cost averaging’.
The timeline
Now you know you shouldn’t invest a large sum of money, all at once. Instead you should opt for an SIP.
The only question is – how much time should you take to invest this money?
An efficient way of calculating your investment timeline is to calculate the time it took you to accumulate these funds. Ideally, you should invest this money in half that time.
However, it is recommended that you invest this money in not more than three years.
Three years is a good time to go through an entire market cycle, and capture both the market rise and fall.
Beyond this timeline, there isn’t any real advantage to staggering your investment. In fact, a major downside to a longer timeline is that you may be tempted to spend this money.
Our take
Do not invest a large sum all at once. Instead, always plan an SIP.
To calculate the timeline for your SIPs, consider the following:
- How large is this sum?
- How important and valuable is this money for you?
- How much time, effort, and energy went into accumulating it?
- Invest the money over a shorter duration if you have a higher income.
- Or, if your risk appetite is low, invest this money over a slightly extended period.
Do not take more than three years to invest your lump sum.
The key to your wealth, dear reader, is always in disciplined investing!
Source- Valueresearchonline
