What is Lumpsum Investment
A lumpsum investment is a method where an investment in a mutual fund is made in one go. They are usually made in great amounts, unlike SIPs which are small investment amounts at regular intervals.
Lumpsum investments do not occur at regular intervals, instead, one can make these at their disposal. For example, let’s say Priya wanted to investment Rs.1,00,000 in a mutual fund.
She didn’t want to split the amount to be put in small investments at regular intervals, since she had surplus money lying idle in her bank account. As Priya is well aware of inflation risk, she decided to put all of it in one go.
What is a lump sum investment in a mutual fund
Lump-sum investments in mutual funds are usually preferred by prominent players and investors who particularly depend on company stock appreciation for capital creation.
For an investor with a sizeable investment amount and a high-risk capacity, a lump sum mutual fund investment can be a good opportunity.
For example, you get an unexpectedly-large bonus one year. After setting aside money for all your preplanned commitments and investments, you still have Rs.75,000 left to invest.
You decide to take a risk with this amount because it is in excess and you have no specific plans for the same.
You could invest the entire amount in a single mutual fund scheme of your choice. This could be different from investing Rs.6,250 every month for a year.
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lump sum investment advantages
Lump sum investment refers to Investing a considerable amount in a Mutual Fund scheme. In lump sum investing, the money is deposited as a one-time down payment. Individuals who are having a large amount can deposit a significant proportion in Mutual Fund.
Lump sum mode of investing is opposite to Systematic Investment plan or SIP mode. One can invest lump sum amount either in fixed Income or Equity Funds depending on their risk-appetite, investment tenure, and investment objective.
Though most of the individuals prefer investing in Mutual Funds via SIP yet, there are some advantages of lump sum investing. So, let us understand the benefits of lump sum investing in Mutual Funds.
It gives the benefit of the power of compounding as the money is invested in a larger chunk for a longer duration of time.
Investors can time their investment and gain better returns in a bullish market.
Investing your Large Amount
By opting to invest via lump sum mode, you can put your big amount in Mutual Fund Investment. Consequently, during growth in the market, the investment also sees an increase in value. More than that in the SIP investment, because you may not have completed the payment duration as yet.
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Best for Longer Duration Investment
If you can set aside your Lump Sum for a long term, say 5-years or even more, then parking your money in Mutual Fund Investment will bring no harm. And if you can hold it for a tenure of 10-years, then the gains would be huge. Even, for 3 to 5-years, putting your lump sum in Debt Mutual fund investment is advisable.
Ease of Investing
If you are like me and the other 90% of the general public. And forget to pay the bills till we get a reminder. Or hit the snooze button on the reminders we’ve put on the phone. Or are you busy at some important meeting with the boss or clients? Lump-Sum mode is so much convenient, then. It needs a very regular, careful and steady person who pays the SIP amount, on time every time.
Invest for the Timing
Investing your lump sum amount in Mutual Funds. At the time when the market is at its low and showing growth potential. This is the time when you can earn the highest returns.
However, you should avoid lump sum investment in Mutual Funds at the time when the market is already at a peak. Then you may end up in a loss.
Ideal for Long-term Tenure
Lump sum investment is suitable for individuals who prefer to invest through long-term. Long-term investment in case of lump sum investment can be considered for an approximate investment tenure of 10 years or more.
However, for lump sum investment in Debt fund, individuals can also choose to invest for a medium-term tenure.
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Convenience
Lump sum mode is generally convenient for individuals as people who are having a large amount can spread their investments. However, if the investment is done through SIP mode then they have to be careful that the amount is invested at regular intervals.
One time investment
Lump sum gives an opportunity to invest a large amount in a single transaction, allowing you to buy more mutual fund units and maximize your returns by entering the market at the right time.
More Benefits
Mutual Funds Lump Sum Investment earns higher returns than any other comparable investments, such as a fixed deposit.
Disadvantage of Lump Sum Investment
Irregular investment
Lump sum plan does not instill investment discipline. It also does not take care of regular savings that an investor might have.
Not ideal for short term
If the requirement of funds is in the near future, then a lump sum investment may not be the best option as the real returns are derived only over the longer term.
Higher risk
As the sum is invested at one go, the investor may end up buying lesser units if the market is on a decline. There is no option of buying units in between or regularly.
The only option is to invest in a new fund for which an investor may not even have funds due to single cash outflow owing to lump sum payment. So, the market timing is quite crucial while investing through lumpsum method.
How to invest a lump sum amount in mutual funds
Investing the lump sum
It is important to deploy any lump sum one receives into investments. One way to do so is to invest in a liquid fund and then transfer bit by bit into an equity fund.
Prerequisites
To invest in mutual fund schemes, investors must be KYC compliant. This can be done at the AMC office or registrar office or at a KYC Registration Agency (KRA).
There is a standard KYC form to be filled by the investor. Documents such as copies of prescribed address proofs and identity proofs must be furnished along with the form.
Choice of schemes
Once KYC formalities are done, the investor has to decide which schemes to invest in. Since the investor is going to set up systematic transfer plan (STP), he needs to choose a liquid fund and equity fund of the same fund house. It is advisable to consult an adviser in order to make a rational investment choice.
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Investing in liquid fund
A mutual fund application form for purchase must be filled to invest in a liquid fund. A cheque in favour of the specific liquid scheme should be attached with the application form. If the investor is not taking the services of an adviser, he can submit the form at the AMC office himself or investor service centre indicated by the fund house.
FAQs On lump sum investment in mutual fund
What is lump sum mutual fund?
A lump sum investment is depositing the entire amount at one go. Lump-sum investment is a popular way of investing in mutual funds.
If you invest the entire amount available with you in a mutual fund scheme, it is called the lump-sum mutual fund investment.It is an excellent way of investing in the long-term.
How much is a lump sum?
A lump sum is a single payment of money, as opposed to a series of payments made over time (such as an annuity).
How does lump sum work?
A lump-sum payment is an often large sum that is paid in one single payment instead of broken up into installments.
They are sometimes associated with pension plans and other retirement vehicles, such as 401k accounts, where retirees accept a smaller upfront lump-sum payment rather than a larger sum paid out over time.
What is lump sum settlement?
A lump sum settlement is just what it sounds like: the insurance pays you one big chunk of money all at once and then washes their hands of their financial obligation to you.
When you receive workers’ compensation benefits, you will usually get a set amount per week until you are medically cleared by your doctor.
Which is better lump sum or structured settlement?
A lump sum payment is generally preferable to a structured settlement in an injury case, but there are some exceptions.
The majority of settlements in personal injury cases are lump sum payments. A structured settlement is when part or all of the settlement amount is paid to the plaintiff over a period of years.
What is the best investment for a lump sum?
Invest the lump sum in a liquid fund. Then start a Systematic Transfer Plan (STP) from the debt fund to the ELSS. Your corpus will not only earn higher returns than a savings bank account but will also allow for systematic investment.
More Information : Best Mutual Funds for Lumpsum Investment
When should I invest lumpsum?
A lump sum is a single large investment done by an investor in one go in any mutual fund scheme. A lump sum investment is generally considered when the investor has a big corpus to invest.
What is an example of a lump sum?
A lump sum payment is often associated with a single amount paid to acquire a group of items. For instance, a corporation might pay $50,000 for the inventory and equipment of a small manufacturer that is going out of business. The $50,000 is a lump sum payment.
Conclusion:
The market is never the same. If you invest for the short term, you will put yourself at a lot of risks. So, if you want to avoid risk, you should invest for the long term, when you have a better chance of making a return.
If you do or want to make lump sum investments, you must be careful about the timing of your investments. If you make a lump sum investment at the wrong time, your capital may suffer serious losses, which may take years to recover.
Because all mutual funds invest the money in the stock market, it is normal for the mutual fund to fluctuate.
This fluctuation is just for the short term, so do not sell your mutual fund units out of fear or greed, but rather hold them for the long term.
Lump sum Investment has a higher risk than SIP; however, if you are willing to bear a little more risk, you should absolutely consider Lump Sum Investment.
I hope you understand what is Lump Sum Investment? How to Invest in Lump Sum?
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