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How to invest in equity mutual funds in volatile markets: Lump Sum

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The stock market has been quite volatile so far this year. In late January, the Sensex reached its all-time high of 36,283. The gains made in December’17 and January’18 got reversed in February-March’18. In late March’2018 the Sensex made an intermediate bottom of 32,596 – a fall of over 10%. Such a fall in just two months can spook investors, but in April’2018 the Sensex stabilized and is climbing gradually again. On April 24’2018 the Sensex closed at 34,616 – just about 4.5% shy of the all time high.

While reduction in volatility must be reassuring for investors, concerns remain in the minds of the investors. Memories of the 20% correction in 2015-16 linger the minds of many investors who have been around for the last 3 – 4 years or more. If you jog your memory back to the early months of 2015, you will remember that the correction took place when the market was at its peak and sentiments were extremely bullish. Should the average investor feel more confident about equity in wake of the resilience shown by the market in April 2018?

The answer depends on what type of investor you are. If you are a long term investor, then you should feel confident about equity because historical data shows that, equity is the best performing asset class in the long term. If you have already invested in equity mutual funds with a long investment horizon, you should remain invested irrespective of where the market is headed in the short to medium term. However, if you are a short term investor then you should be careful because near term uncertainties persist, despite the resilience shown by the market over the past few weeks.

Again, some investors who are looking to make fresh investments in equity mutual funds through lump sum or SIP may ask, whether this is the right time to make investments or should they wait for the uncertainty or volatility to get over?The answer depends on the mode of investment you are considering – lump sum or SIP? Let us first discuss the underlying causes of volatility (uncertainty) in the market and the outlook in the near term.

There are several complex factors at work in the capital markets causing this uncertainty. A comprehensive discussion of the factors affecting the stock market sentiments is outside the scope of knowledge of the average investor, but for the sake of investment awareness we will try to discuss some of the factors in the simple terms.

To know more about equity mutual funds, we suggest reading the following –

What are equity mutual funds and their types

Factors causing uncertainty

The most important global risk factor at play right now is “yield gap”. In very simple terms, yield gap is the difference in yields (returns) of government bonds and shares. If the yield gap is large, i.e. the return on investment in shares is much larger than return on government bonds, global funds will get allocated to shares and the price of shares will rise. But if the yield gap narrows, then the reverse allocation takes place, from shares to government bonds because government bonds are much safer than shares.

From a global perspective, US Government bonds or treasury bonds are seen to be the safest asset class in the world. US Government bond yields have been rising since the Federal Reserve has started hiking the interest rates. On the other hand, earnings yield of shares have either been shrinking or not rising enough. This has caused the yield gap to narrow and has caused a change in global risk sentiments. Unless earnings (EPS) increases substantially, yield gap will continue to narrow because the Federal Reserve is committed on a path of normalizing (increasing) interest rates. This is the biggest concern in the stock markets all over the world including India – in fact, the concern is higher in India because it is an emerging market and emerging market stocks are perceived to be more risky than developed markets.

The other major concern for Indian stock market is the trajectory of crude oil prices. India is a net importer of crude oil and increase crude oil price hurts our economy. Crude oil price has already surged 12% this year and you are paying much more to tank up your automobiles. Crude oil prices were falling for nearly the last three years and this helped the Government manage its fiscal deficit, but rising crude prices will have a direct impact on the our foreign exchange (rupee to dollar) rate and our fiscal deficit. If fiscal deficit widens, then Government will have to borrow more to meet its spending program. If the Government borrows more, the interest rates / bond yields will go up and this will be negative for Indian equity.

Apart from these two macro factors, there are also risks associated with upcoming political events this year. Several states in India will go for Assembly elections this year and the outcome of these elections will be seen as a leading indicator for the Lok Sabha elections next year. Some of the election results are likely to be very tight, as opinion polls are showing in Karnataka, and this may cause political uncertainty. Stock markets do not like political uncertainty and markets are likely to be jittery ahead of these state elections. We discussed some of the factors that are causing uncertainty or likely to cause uncertainty in the market over the coming months. Therefore, we expect the market volatility to continue and investors should prepare for it.

How to invest in lump sum in uncertain market?

You need to have high risk appetite to make lump sum investments, when the stock market is near or at its high and there are uncertainties looming because if the market corrects, you will see your investments falling in value. If you have a long investment horizon, then market will eventually recover and you will get good returns on your investment, even if you invested at market high. However, there is no denying that volatility is stressful for investors; no investor will like to lose their hard earned money, even if it is only a book loss and not actual loss.

The usual tendency of many investors in India is to wait for market to correct before putting in fresh money. However, investors usually go wrong with such a strategy because it is extremely difficult, if not impossible to time the market. Firstly, you never know if the market will go much higher before correcting. Eventually, when the market corrects, the bottom may still be higher than what it is today and you may end up investing at a higher price. Secondly, even if the market falls before going higher, it is extremely difficult to catch the bottom. A bear market causes such severe damage to investor sentiments that, investors fear to invest even when the market has fallen 20 – 30%. Even when the market rises after the bear market is over; investors usually fear another crash and refrain from investing. By the time investors feel confident enough, market rises so rapidly that investors do not get an opportunity to enter at attractive valuations. We saw happening during and after the financial crisis of 2008. Therefore, waiting for market to correct from its all time high before investing, is not a good idea and you may miss good opportunities.

Check the lump sum returns of mutual fund schemes in India

STP can be useful for lump sum investors in volatile markets

If you are worried about valuations and fear volatility in the near term, then for lump sum investors, investing through Systematic Transfer Plans (STP) is a good idea. In STP, you invest in lump sum in a zero load liquid fund or ultra-short term debt fund. Then you can transfer fixed amounts, every month or twice a month, over a certain period of time to the equity mutual funds of your choice. In STP, since most of your investment in the early stages of the STP will be in the liquid fund, your risk is much lower. STP will help you take advantage of market volatility because the funds transferred from liquid to equity mutual funds may be invested at lower and lower prices.

Read: what is mutual fund STPs and how it defends volatility

If your STP tenure coincides with the period of volatility / correction then you are likely to get excellent results from your investment. You can never be sure how long the period of volatility will last, so you may have to go with your gut feel in deciding the STP tenure. However, based on past experience, severe market downturns do not last for more than a year – even in 2008, when the market fell by more than 50%, the correction was over in about 12 months. So you may decide to go for STP tenure of 1 year and if you feel that, the market has bottomed out before 1 year is complete, you can stop your STP at any point of time and switch your balance money in liquid funds to equity funds.


To illustrate the benefit of STP, let us compare lump sum versus STP investment. Let us assume that you wanted to invest Rs 1 Lakh on March 1, 2015. If you recall, the market was at its peak then and the market corrected shortly thereafter. One option was to invest in lump sum and the other was STP.

Let us suppose, you wanted to invest in a diversified equity mutual fund, namely Aditya Birla Sun Life Advantage Fund. In the first option, you invested Rs 1 Lakh in lump sum in Aditya Birla Sun Life Advantage Fund. The value of your investment today (April 24, 2018) would be Rs 139,378. Even though the market corrected by around 20% in 2015 – 16, you still made nearly 40% profit in the about three years time. This illustrates, what we mentioned earlier – if you have long investment horizon, then you can get decent returns over the tenure even if you invest at market peaks.

However, if you invested through STP, could you have made more money? Let us assume, instead of investing in lump sum in the equity fund, you put your lump sum money (Rs 1 Lakh) in a zero load ultra-short term debt fund, Aditya Birla Sun Life Cash Manager and transferred Rs 9,000 every month (nearly one twelfth of the lump sum amount) to the equity mutual fund, Aditya Birla Sun Life Advantage Fund. Let us see what results we get.

STP - Transferor Scheme: Aditya Birla Sun Life Cash Manager

STP - Transferee Scheme: Aditya Birla Sun Life Advantage Fund

STP - Total Returns

See the above STP research result live on our website

You can see from the tables above that, the current value of your investment using 1 year STP is Rs 149,688 – nearly Rs 10,000 more profit than what you would have got from your lump sum investment. In the STP example above, there was some balance in the ultra-short term debt fund account / folio at the end of STP tenure. For the sake of simplicity, we did not touch the ultra-short term debt fund balance but if you switched the ultra-short term debt fund balance to the equity mutual fund at the end of the STP tenure, you could have made an additional profit of more than Rs 3,000.

You can also try our STP research tool to see how STP works

Did you also know that you can transfer only the profits of any equity fund to a debt fund

Conclusion of Part 1

In the first part of this article, we discussed that while the stock market has stabilized somewhat in the last few weeks, various global and local factors discussed in this article, may cause the market to remain volatile in the near term. Volatility is not within our control and it is certainly not desirable to investors, but it should deter you from investing for your long term goals. There are two types of equity mutual fund investments – lump sum and SIP.

A must read here is - What are the advantages and disadvantages of investing in mutual funds in India

Lump sum investing is more difficult than SIP and so we decided to address lump sum investing in the first part of this article. Investors should understand that, trying to time their lump sum investments in volatile markets is very difficult and more often than not futile. If you have a long investment horizon, you can invest in lump sum even at market peaks and still get decent returns in the long term. However, a better approach in volatile markets is to use STP and you can get even better returns in the long term. In our next article, we will discuss how SIP works in different market conditions.

Please stay tuned!

Mr. Ajay Kumar Jain, M.Sc, Chairman And Managing Director
Being the Chairman And Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.

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