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Lump Sum Equity Investing – The Capital Protection Way


Assume I land up with a large corpus of money from some source. And I am tinkering with an idea to put a decent part of it in equity index funds. Just that I am getting jitters given the risk, even though I am sure of staying invested for good 10 years to come. How do I go about this?

With the current yield to maturity (YTM) of low risk overnight mutual funds hovering around 5% ish, I would dump the conventional wisdom of doing it gradually (SIP’ing it as they say) and deploy nearly 48% of the “large corpus” immediately. Yes, you heard it right – ASAP, at one go, market levels not withstanding.

Sounds crazy, no? On the face of it maybe, but the numbers I did have a different take, and I would tend to go with the numbers. Read on if you too want to check out the story numbers tell in this case.

Equity investing is “risky”, I get it, so does everybody else. But what does the word “risky” stand for in simple terms? While there are various definitions of “risky” when talking money and investments, the one which makes most sense to me is losing one’s capital, in nominal terms. Now we are getting somewhere – what will make me feel “safe” is “capital protection”, at least in nominal terms. I am ready to “risk the return” part but not the capital.

Say I assume a worst case scenario playing out and equity funds I invested in lose 10% every year. By the end of 10th year, my equity funds would be down by nearly 41% in absolute terms. That’s risk playing out. But on a portfolio basis, with balance capital of nearly 52% in overnight funds***, my capital still stays protected. See here for yourself. I have made myself a simple, transparent and efficient “Capital Protection” mutual fund investment plan. If I want to reduce the risk further, I will knock off another 8% from equity fund investments and keep my allocation to 40 – 60. This will hopefully take care of any downside in overnight funds YTM. However, to do some "regret minimization" of markets tanking post few days I deploy large sum in equity funds, I may look to doing this over a period of 6 months to 1 year. Not later than that. 

And lastly, bonus of doing the numbers, and possibly believing them, the upside of such “not so risky” venture if equity funds do better:

-          “Bad case scenario”: Rather than loosing 10% every year, equity funds stay flat for full 10 year period. Initial capital invested now grows to 1.31 times, which is same as getting annualized return of 2.73%

-          “Normal case scenario”: Equity funds gain 10% every year. Invested capital now grows to 2.07 times with annualized yield coming to 7.53%

Sounds to me as pretty safe way of taking reasonable equity exposure while keeping the risks in control!!!

 

***Another assumption implied here is overnight funds YTM remains constant through out investment period of 10 years. A big assumption this one too – but we got to have these assumptions to work out the numbers.

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