When markets are close to new highs a lot of investors ask the same question.

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I have some money in my bank account, should I invest it as a lump sum or buy a liquid fund and STP (systematic transfer plan) into an equity fund for over a year.

Over time two narratives have emerged:

STP - why take the risk of investing at highs? The market will likely to revert so averaging your buy price over a year is the way to go.

Lumpsum - time in the market is all that matters. Since we cannot predict what the market will do (can go higher or lower), just invest as soon as you have the money.

The advisor community, by and large, has adopted that STP is the way to go.

We ran a simple backtest to see what historical data suggests. We start with Nifty index data going back to 1994.

Over the past 24 years, the market has made a new all-time high in 48 months. In each of those months we set up two investments:

Invest in a liquid fund and then STP into Nifty over one year.

Invest in Nifty.

After one year we see which investment did better. Times outperformed

Of the 48 instances when we set up the STP vs lumpsum race, lumpsum investment outperformed 60 percent of times.

More importantly, investing in a lump sum in all 48 instances would have returned on average 12 percent, while one year STP returned on average 8.7 percent after one year.

Lumpsum investing has outperformed STP even when markets are making new highs. It is likely to work out better 60 percent of times and with higher expected returns.

The STP or lumpsum debate eventually is one of market timing. Doing an STP implicitly assumes that you can time a market high - it is the only scenario that justifies doing an STP over a lump sum. If you do not think you can time market highs, then don't STP.

The narrative that data is telling us goes something like this - advisors recommend STP at market peak assuming that markets will correct.

Future though is unpredictable and markets don’t correct as often as expected. Investor accumulates higher NAV (net asset value) through STP.

Investor returns = lower than Fund returns!

We ran the same analysis on S&P500 (from 1950) and NASDAQ (from 1971) and the results are the same.

Lumpsum outperforms roughly three out of five times and also on average has 2-3% higher 1-year returns.

So, next time someone asks - to "lump sum" or to "STP", remember the data says to "lump sum".

Gaurav Rastogi is the CEO of Kuvera.in: a free direct mutual fund investing platform. Gaurav managed a pan-Asia quantitative portfolio for Morgan Stanley before he started Kuvera.

First Published:Jul 27, 2018 11:58 AM IST