Surely, you would not want to put the entire sum into equity funds at one go. Should you distribute it equally over all the periods? Investing through a SIP seems a safer option. But, there is a way to do it. You may keep your money in the bank and start a SIP to the mutual fund you have chosen. However, you would earn a meagre 4% from your savings account.
Better still, put money in a liquid fund scheme and then create a systematic transfer plan by which your investment from your liquid fund would be systematically transferred to your equity fund. As liquid fund schemes invest in money market instruments, you could earn an average return of 6% per annum.
For the past one-year period ended 31 May 2012, these schemes returned an average of 9.30%; 10.57% was the highest return and 7.29% the lowest. The best advantage that liquid fund schemes have is, well, liquidity. There is no entry-load or exit-load and thereby you can put in cash and withdraw at anytime. If you had done a systematic transfer plan (STP) for the same periods we mentioned earlier, you would never have lost money in the seven-year and 10-year periods. In the five-year periods, your chance of loss would come down to 4%, compared to 15%—had you made a lump-sum investment. Only on eight occasions you would have lost money. These were periods when a lot of purchases were made closer to the market peak, raising the average purchase price. Even then the maximum loss was just 1.56% which (for the period September 1996 to August 2001). A lump-sum investment for the period would have gone down by 2.79%. The maximum loss registered through lump-sum investing was 7% whereas an STP would have ran a loss of just 0.40%. Therefore, you can improve your chances of coming out better than lump-sum investing using an STP method.
We tested this method with an equity scheme and liquid scheme of the same fund house for the period December 2006 to December 2011 when the index returned 2.31% and a SIP on the index returned 0.29%. Had you invested in the equity scheme through a normal SIP, you would have earned an annualised return of 3.49%. However, had you put your entire money in the liquid scheme and systematically transferred it to the equity fund, your annualised return would be as much as 7.12%.
