Got a windfall? Don't put it in a savings a/c

Windfalls or coming into large sums of money sure makes you feel rich but if you want to stay rich, then the challenge is to ensure that the money lasts for a really long time.

Incidentally, experts advise that when one does not know what to do with a large sum, the first thing to do is take it off the bank savings account.

"The money lying there not only earns low interest but tempts you to blow it. Hence, park it in short-term avenues such as liquid funds or ultra-short term funds until you decide or get advice on where to invest the money in,'' says Vidya Bala, head of mutual fund research, FundsIndia.

If you have a lump sum to invest, it is best to revisit your investment plan, advises certified financial planner Gaurav Mashruwala.

"Firstly, buy adequate health and life insurance. Secondly, if you have any loans, pay up the loans. After that, you can start goal-based investing,'' says Mashruwala.

Most people are confused where to invest for the best returns. "Where to invest would depend on whether they have a near-term use for the money,'' says Bala.

"If it is retirement money and the investor needs to create an income stream, they could deploy it in a combination of ultra-short and short-term debt funds and do a systematic withdrawal plan to generate their own income. If it is for the long term, a combination of equity and debt funds will work well. So one needs to know the purpose and the time frame before they can decide where to invest,'' says Bala.

The most important task is to create a goal for such money and then allocate and invest accordingly. While goals would depend on the individual's requirements, broadly your goals could include creating funds for a specific purpose such as a retirement fund, an emergency fund, a kids education or a marriage fund or even a fund for personal goals (say a foreign trip), etc.

A retirement fund is a must. HDFC Pension's CEO Sumit Shukla advises that 20-30% of the sum should be invested for retirement. He suggests investing the lump sum initially in Tier II account of NPS from which some money could be transferred into the Tier I account every month via systematic withdrawal plan. "This would help to ensure that initially the money is invested in debt (Tier II account) and as one invests in the Tier I account, slowly the equity portfolio is also built up,'' says Shukla.

"Corporate debt has earned 10.47% while government debt has earned 10.35%. Compared to the 8.8% returns from PF, this difference would work out to be huge over a period of time,'' points out Shukla.

Depending on your risk and return profiles, there is a range of avenues. "Investors seeking low to medium risk can examine fixed deposits, debt mutual funds, corporate bonds, tax-free bonds and monthly income plans.

However, investors with higher risk preference can look at balanced & equity funds, direct equities, private equity & real estate funds,'' according to a DBS spokesperson.

"Lump Sum investing is fine when it comes to low-risk debt funds. However, when it comes to equity funds, it is important to understand the risk of timing the market by investing in one go. Ability to take near-term falls is a must of one chooses to invest lump sum,'' says Bala. A better option is to invest in a phased manner through an SIP (systematic investment plan).

It may be a good idea to take professional advice. "Also, consider the impact of tax on the returns,'' says the DBS spokesperson.

The mistake that many people who come into big money suddenly make is that they start living a lavish lifestyle. "Instead, invest in income generating and growth-oriented assets. Use the returns from these assets to enhance your lifestyle,'' advises Mashruwala.

The solution is to invest wisely keeping in mind two primary goals: ensuring safety of capital and also growth.