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How long should I spread a lump sum?

Dhirendra Kumar sheds light on the approach that can be used to decide the time frame for spreading your investment

How long should I spread a lump sum?

If we receive some extra money from sources, like maturing insurance policies or others and want to invest that amount in mutual funds, then how long should I spread it?
- Varun

The first question about the time period of spreading your investment is very important. There is no thumb rule or guideline that we have. But still I will share something that I feel can be a useful thumb rule. The approach that I suggest doesn't have any scientific base but still has a behavioural basis. So, half the time taken by you to earn the amount that you received as a lump sum is the ideal time over which you can consider spreading your investments. For example - if you earn Rs 1.5 lakh in six months, then invest it over three months. If you earn it in one year, then invest it over six months.

However, if this is your retirement corpus, which has been accumulated over a lifetime, then the half time rule should not be used. This is because if it has been earned over 30 years, then you can't keep on investing it for over 15 years. This amount shouldn't be spread for more than three years. The reason for this is that for the half time period rule, during the working days, one can still have an assurance that one can again earn the amount if it witnesses losses.

But when it comes to your lifetime accumulation - it should not be subject to any heavy losses. This amount should be spread in three years even at the cost of any opportunity loss because you are past the earning years of your life. Also in three years usually you can experience a full market cycle.

The idea behind spreading your investment is to avoid investing big sums in a rising market. Following this thumb rule you can well stay away from market peaks.

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