You can make mutual fund investments periodically through Systematic Investment Plans (SIPs) or invest a huge amount of surplus funds in a single go via the lumpsum route. While both methods permit you to invest in your chosen mutual fund scheme, there’s a notable difference between both options i.e., investment frequency. To decide whether the lumpsum route is better suited for you, let’s first understand this option better.
What’s a lumpsum investment?
When you opt for lumpsum investment in a mutual fund, it means that you invest a bulk amount in one go in the mutual fund you select. Such an investment is generally preferred by experienced investors who are aware of the market trends and movements. This investment route is also suited for investors who have a considerable investible surplus in hand.
For instance, say you received your year-end bonus at work. You can decide to use the entire bonus or a part of it to invest in a mutual fund plan through lumpsum option. This option to invest one-time is different from investing month on month or at predetermined intervals for a specific time period.
How to invest a lumpsum amount in mutual funds?
Here are two essential factors to keep in mind before you go ahead with a lumpsum investment in mutual funds:
1. Be mindful of market timing
With lumpsum investment, you must consider identifying the right market timing. For this, it is recommended to invest when market sectors are down but are displaying high growth potential. In such a scenario, you can generate higher returns via a lumpsum strategy than the SIP route. As lumpsum investment is based on the fundamental concept of buying units at a low cost and selling at high, you can opt for this route to generate higher returns in equity or equity-linked mutual funds if you are able to identify market movements and figure out market lows.
2. Invest for a long-term horizon
Lumpsum investments in equity mutual funds are prudent for you if you are in this for the long haul, preferably five years and above. Suppose you invest a huge amount inan equity mutual fund. As equities are susceptible to market volatility over the short term, investments may underperform. Owing to this reason, such investments are recommended to be kept for the long term as the probability of earning losses gets lowered and the probability of generating higher returns increases. By investing for the long term, you can also meet your long-term goals such as creating your retirement fund or funding your child’s education or wedding.
While the SIP route to invest in mutual funds is a more popular option, investing through the lumpsum route can even be rewarding if done the correct way. Evaluate your financial potential before you make the investment. Before you opt for the lumpsum route, ensure you have no instant monetary needs and are willing to stay invested for thelongterm. In case you are confused, you may consult an investment advisor or take the help of an online lumpsum investment calculator to compute your estimated earnings.