The power of lumpsum investments in mutual funds
What is mutual fund lumpsum investment?
A lumpsum investment in mutual funds means that investors have parked a chunk of their funds in a scheme. Lumpsum investments can be a driving force in an investor’s financial journey. Usually, investors with a sizeable amount of capital and a relatively high risk appetite prefer this mode of investment.
- Table of contents
- What is mutual fund lumpsum investment?
- Factors to consider before investing lumpsum amount in mutual funds
- Invest in a long tenure
- Be mindful of market timing
- Consider a systematic transfer plan (STP)
- FAQs
What is mutual fund lumpsum investment?
A lumpsum investment in mutual funds means that investors have parked a chunk of their funds in a scheme. Lumpsum investments can be a driving force in an investor’s financial journey. Usually, investors with a sizeable amount of capital and a relatively high risk appetite prefer this mode of investment.
Here are some unique features of lump sum investments:
- Unlike SIPs wherein you need to invest in regular intervals, lumpsum investment doesn’t require multiple transactions.
- In case of ELSS, the entire lumpsum amount invested will mature after three years of investment, unlike SIP as each SIP will have individual three years maturity.
- Surplus income like a bonus, leave encashment, ex-gratia amount can be put to better use with lumpsum investment option.
- Timing is the essence of compounding. Lumpsum investment has the potential to benefit from the power of compounding.
- When the market is low, you can buy more mutual units and sell them when the market improves, making better returns.
Factors to consider before investing lumpsum amount in mutual funds
Though lumpsum investment option have many benefits, it is advisable to consider the following factors before opting for them:
Invest in a long tenure
One can reap the benefits of lumpsum mutual fund investment if one stays invested for a longer tenure, preferably 10 years or more. The longer the tenure, the more time the investment has to weather market fluctuations and benefit from the power of compounding.
Let’s suppose you have invested a corpus of money in equity funds and there are short-term fluctuations in a volatile market. However, if you hold your investment for a longer duration, the probability of losses is reduced and there are chances of better return potential.
Thus, by aligning your investment with long-term financial goals, such as retirement or a child's education, you can mitigate short-term market volatility and potentially reap significant rewards over time.
Be mindful of market timing
While it is tempting to time the market and invest when it seems most favourable, attempting to predict market movements can be risky. Even seasoned investors find it challenging to time the market accurately and consistently. By staying invested for the long term, you can withstand market volatility and maximize your return potential.
Consider a systematic transfer plan (STP)
A Systematic Transfer Plan (STP) can be preferrable for investors who are wary of investing a lumpsum amount directly into a mutual fund scheme. An STP allows you to transfer a fixed amount periodically from a liquid or debt fund to an equity fund of your choice. Since debt funds offer liquidity, it would be sound to invest a lumpsum amount in debt funds and transfer a small portion of the fund into equity or hybrid funds. This approach helps to mitigate the impact of market volatility by gradually moving your funds into equity over a period. It also provides the benefit of rupee-cost averaging and reduces the risk of investing a large sum at an unfavourable time.
Conclusion:
When parking a lumpsum amount in mutual funds, investors need to consider their investment horizon, remain mindful of market timing, and explore strategies like systematic transfer plans (STPs). By embracing the power of lumpsum investments and combining it with careful consideration, investors can build wealth in the long run.
FAQs:
SIP vs Lumpsum: what to choose?
Investors can benefit from the wealth building potential of mutual funds through both SIP and lumpsum investments. The main distinction between SIP and lumpsum techniques is the frequency of investing. SIPs allow you to invest in a mutual fund scheme on a regular basis, such as daily, weekly, monthly, quarterly, or half-yearly. Lumpsum investments, on the other hand, are a one-time large investment in a specific scheme.
How should I determine the amount of investment that has to be done in lumpsum?
Determining this amount can be dependent on various factors such as investment objective, cash flow, risk tolerance and other asset allocation. Seeking professional guidance can help a lot when deciding on the amount to invest.
When to opt for lumpsum investment option?
People who have a substantial sum of money to invest typically choose it. When investing in a lumpsum, one can choose their investment time range based on their risk tolerance. A lumpsum investment is frequently more practical for people who desire to invest a substantial sum of money.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.