a lump sum amount, no matter where in the world, is a difficult decision to make. We see it as different than say small amounts periodically.
The impact of the usual risks is higher for one. Getting your timing wrong whenin anything market-linked can have long term consequences. This is why there are some factors you as an investor need to keep in mind when making the decision to a lump sum amount.
First, understand what a lump sum is.
Here’s a simple rule I personally use. If the money that you are looking at is worth around 3 months of savings or more, consider it a lump sum. As an, this amount can vary significantly based on your earnings, your location, your needs etc. This lump sum could be proceeds of an asset sale such as property or a year-end bonus. FDs maturing soon also qualify for this.
Next, consider whether you have immediate and essential needs that this money can take care of?
Money is meant to be used, whether savings or earnings. If you have a critical need such as paying off short term debt or unplanned bills etc, then the lump sum can be used there. If your other savings andplans are on track then it might be also ok to simply spend this on leisure activities as per your preference. It all depends on where you stand financially. If the lump sum is a surplus beyond immediate needs, you should seriously consider it.
If you have decided that you want to invest the lump sum then next consider when you might need the money.
When you need the money is critical to deciding where to. Allocating an to a properly planned goal is the cornerstone of effective , no matter what your personal wealth status. If you have an in the country of your residence then do take their suggestions into account. You can also consider reliable online solution providers – like Scripbox.
Coming to the “when” part. For the purpose of, anything less than 4-5 years can be considered short term and anything more than 7-8 years is long term. The medium-term is a fuzzy grey area but we will address that separately.
Once you know “when”, you will know where and importantly the “why”.
Duration generally decides asset class. It’s a good thumb rule to remember.
Most-based instruments do a less than an ideal job in the short term. The fault lies in the nature of markets. As you might well be aware, markets can be choppy and quite unpredictable in the short term. Volatility is the term market pundits use. This means that a lump sum amount in when you need the money in less than five years is taking on more risk than necessary and frankly, simply greed in action. So here’s what actually makes sense:
If it’s the short term (1-5 years) you are looking at…
Choose fixed income-based instruments like debt funds – preferably liquid funds and short/ultra-short duration funds and prioritise security and stability of your money over making a quick buck. You can simplyin the debt fund of your choice at one go and sit back and relax. However, keep in mind that the debt fund ticks all the right boxes in terms of credit risk and duration risk.
As aninvestor, you might have to consider whether you want to in India or your country of residence. Fixed income growth rates in developed nations such as the US and Canada can be quite low so keep this mind if choosing your country of residence as the destination.
If you arein India then consider doing so via an NRE account which is fully repatriable or an NRO account. NRO account funds can be remitted to a limit of $1 million and other conditions. It would be best to speak to your tax and on the final choice.
If it’s the long term (7 years plus) you are looking at and you are fine with big fluctuations for the first 3 years…
Choose-based instruments such as equity mutual funds. In India, unlike the west, are still the better choice despite the entry of passive . If your choice of instrument is good, can deliver inflation-beating, wealth-creating growth over a decade-long period or more.
This, however, won’t happen without a few hiccups in the form of market-linked fluctuations asmarkets go through their cycles and fortunes of listed companies wax and wane.
Again an NRE account might be a better choice if you intend to transfer the proceeds in the future to your country of residence if your stay is for the long term. Speak to your tax andbefore taking a call.
Some smart approaches for investing in equity.
Volatility is what makes many investors baulk at the prospect oflump-sum amounts. But what if there was a way to a lump sum but manage the volatility as well?
The best combinations for STPs are generally a liquid fund and a large-cap or diversified (multi-cap) fund. At Scripbox we created an even more secure version of this by having a combination of a liquid fund and an index fund. We call it Principal Protection and Growth. These kinds of solutions can work well for those looking to invest lump-sum amounts in equity but are concerned about the short term volatility their investment would be impacted by.
Enter Systematic Transfer Plan or as we call it Smart Transfer Plan. The concept is simple. Youin one fund and there are periodic transfers from that into another fund.
This is usually done byin a liquid fund and setting up an STP from that fund into an . What this means is that your capital is not exposed to market volatility all at once. Your capital grows at the liquid fund and you also systematically gain exposure to via the STP.
The best combinations for STPs are generally a liquid fund and a large-cap or(multi-cap) fund. At Scripbox we created an even more secure version of this by having a combination of a liquid fund and an . We call it Principal Protection and Growth. These kinds of solutions can work well for those looking to lump-sum amounts in but are concerned about the short term volatility their would be impacted by.
Some specifics for you as an NRI.
You can take up any of the above-mentioned approaches whether you want to an NRE or NRO account.in India or your country of residence. If you decide to in India, you can do this via
Keep in mind the remittance considerations as that will impact your decision.
NRE is a rupee account from which funds are freely repatriable, while NRO account is a rupee account which is usually non-repatriable. However, NRO funds could be remitted abroad subject to limits (up to $ 1 mn in a year) and conditions. Both can be opened either with funds remitted from abroad or from your local funds.
From a convenience perspective, it might be better toin your country of residence if you are for the short term. For the long term, in India makes good sense, especially if you intend to return.
What you should take away.
While there are multiple approaches that you as aninvestor can take while your lump sum, the aim should be to align it with objectives, understanding of the risk factors, and time horizon.
STP is a smart way toyour lump sum money into in a staggered and efficient manner. By staggering , it mitigates market risk. However, ensure you don’t need that money for at least seven to 10 years. If you are very sure about your time horizon, you can directly consider for long term.
Before deciding, do talk to your tax andand consider the specifics of whether to do this via an NRE or NRO account.