Some of us may come across a large sum of capital that we need to invest for the long term. This could be an inheritance, real estate sale, ESOP proceeds, and so on. The question you would ask yourself is – should you run an STP or invest it all in lumpsum? And if you do run an STP, how long should this be?
In this report, we go back in history and see how the numbers play out to answer the question. We looked at actual market data across market segments over the past two decades and analysed how returns changed over different investment periods.
The setup
For this analysis, we used data from 1 April 2005 to 1 May 2026. The following three market indices were considered:
• Nifty 100 TRI
• Nifty Midcap 150 TRI
• Nifty Smallcap 250 TRI
For the STP parking component, the NIFTY Ultra Short Duration Debt Index was used.
For every month from April 2005 to May 2021, we simulated the following:
- Investing a lump sum of Rs. 1 crore into each index
- Spreading the Rs 1 crore across the following STP durations:
- 6 months
- 12 months
- 18 months
- 24 months
Any residual amount remaining in the debt fund after the STP period was transferred to equity in the following month.
We then calculated the value of each investment 5 years from the date of the lump sum investment/ the first systematic investment.
The reason to run an STP instead of investing lumpsum is always about timing – investing at a single market level instead of catching different market levels. And usually, the worry is that the lump sum investment is done at market peaks, after which a correction follows that could have offered better opportunities.
Therefore, we divided the returns into different drawdown buckets to gauge the timing impact of a lumpsum versus STP. We assumed an investment is done on the 1st of every month, and then classified the drawdowns across the following bands:
0% to 5% below peak (this bucket includes periods where returns were positive – i.e., drawdown is 0)
5% to 10% below peak
10% to 20% below peak
From this analysis, we evaluated the following metrics:
- Average returns: How average returns varied between lump sum and STP across each drawdown band
- Distribution: How often lump sum outperformed STP within each drawdown band
Note: We have not considered tax implications in this analysis. In practice, STP from a debt fund may result in a small capital gain, taxed at the investor’s slab rate. However, for the final corpus, all gains are assumed to be taxed as long-term capital gains on equity. Even for the longest STP duration of 24 months, all investments would qualify for long-term capital gains, given the 5-year holding period from the initial investment.
Results
The benefit in a lumpsum investment is that it begins compounding early on. When you run an STP, this delays your market participation. Our analysis shows that the 6-month STP offers the best sweet spot in avoiding timing risks and investing quickly enough to capture compounding.
However, the different market cap segments show different risks in terms of drawdowns. Therefore, where you’re investing may also play a role in deciding lump sum versus STP investments.
Large Caps – long STPs do not work
The Nifty 100 TRI index lived up to its large-cap “stability” expectations. Across 194 monthly investment observations during the study period, the index was within a drawdown of less than 5% nearly half the time. The table below shows the drawdown distribution.
As you can see, periods with drawdowns of more than 20% occurred less than 13% of the time. That is, big corrections do not occur frequently in large-caps. As a result, STPs over a long period significantly impact returns.
Consider the first bucket above (drawdowns of less than 5%), since that is the most frequent. Here, a lumpsum investment would have generated a return of 12.17% on an average if held for a 5-year period. A 12-month or 18-month STP generated 11.74% on an average. A 6-month STP, on the other hand, was similar to the lumpsum return at 12.01%. During steep market corrections (over 20%), a long STP severely impacts returns. The average 5-year returns for a lumpsum works out to 14.4%, against a 10.8% for a 24-month STP and 11.6% for an 18-month STP.
The drawdown period of 10-20% would offer a good market correction to catch lower levels, and thus you may think that a lumpsum investment would be better than an STP. But the numbers show that a 6-month STP would work almost as well as a lumpsum investment even here. The average 5-year returns come in at 13% for a 6-month STP compared to 13.3% for a lumpsum and 13.01% for a 12-month STP.
Therefore, risk minimization through a 6-month STP is a good option in all markets. Such an STP resulted in only a marginal reduction in returns, even during correction phases. Additionally, the probability of a lumpsum beating a 6-month STP is only about 55-65% across the different correction periods.
Midcaps & smallcaps – balancing risk and return
Unlike the large-cap market segment, the Nifty Midcap 150 index spent a larger proportion of time in correction phases. The Nifty Smallcap 250 index was the most volatile among those analysed and remained in deep correction territory (more than 20% drawdown) for over half the time.The table below shows the drawdown distribution for both these indices.
Owing to the steeper and more frequent corrections, a lumpsum investment would often work well in the midcap and smallcap segment. But then, knowing in advance that markets have bottomed out is a tall order.
One way to spot this is to calculate the drawdown from the peak and where this is more than 15%, you can invest through a lumpsum. However, most of us would still be averse to investing large amounts in one go during a steeply correcting market. There is also always the question that markets may correct further!
The good news is that a 6-month STP works almost as well as a lumpsum, even in steep corrections. In the Nifty Midcap 150 index, 5-year returns from a 20% correction worked out to 18.7% for a lumpsum, and 18.5% for a 6-month STP. Even a 12-month STP would have yielded similar results at 18.14%. The chances of these two STP periods beating a lumpsum investment stands at about 40%, offering good odds that a phased investment would work and not result in missed opportunities.
The same holds true for the Nifty Smallcap 250 index as well. While the frequency of steep corrections is highest here, the high volatility in this index means that spreading investments helps mitigate risks and delivers well. During the 20%-plus correction, a 12-month STP manages to beat a lumpsum investment about 60% of the time!
But the best period remains a 6-month STP. Across drawdown buckets, this period delivers similar results to lumpsum investments and better than longer period STPs.
In these segments, returns are far more sensitive to drawdown levels due to deeper and more prolonged corrections. While this may suggest spreading investments over a longer period, such an action of longer STPs (up to 24 months) do not materially improve outcomes, particularly when markets are near their peaks.
Takeaways
Once you have capital to invest, choosing a systematic route over a lump sum is primarily a risk-minimisation strategy, not a return-maximisation one. The rationale for opting for STP is to avoid investing at market peaks. But swinging in the opposite direction and being overly cautious and running very long STPs is also not useful. A 6-month STP offers a reasonable balance between risk reduction and return sacrifice across drawdown levels. Longer-duration STPs, especially during deeper drawdowns, can significantly reduce returns.
For higher-risk segments (mid and small caps), asset allocation and periodic rebalancing are likely to have a greater impact on outcomes than the choice between lump sum and STP. For instance, large-cap indices are in deep correction less than 13% of the time, while small-cap indices are in such phases more than half the time. In a portfolio with large-cap and small-cap; a disciplined allocation with periodic rebalancing can naturally direct more capital towards small caps during corrections, instead of relying on extended STPs in anticipation of such opportunities.
It is also worth noting that small-cap indices tend to deliver lower returns over the next 5 years than large-cap indices when markets are near their peaks. An investor with a defined large-cap to small-cap allocation can deploy the new corpus in line with the target allocation over a 6-month period. Thereafter, periodic rebalancing can help capture opportunities across market segments.
This analysis was based on the all possible 5-year period in the last 2 decades. Use the attached spreadsheet to explore how lump sum and systematic investments performed across any specific investment periods.
