What Is The Best Investment For A Lump Sum?
Lump sum investments in mutual funds are when you invest a more significant sum of money in one go. The goal of such investments is usually capital appreciation or protection. Hence, this is an option for investors who have a more significant sum of money to invest.
This investment method is opposite to systematic investment plans or SIP, where you invest monthly in the fund. The goal of such investments also differs as they try to create a corpus in the longer term. Let us take a closer look at lump sum investments through this article.
Benefits of lump sum investments
More considerable amount – When you invest a more significant sum of money, you put more money in the market. This means that you are giving more money the potential to grow at once compared to a SIP where only a part of your whole investment is put in every month.
For instance, suppose you plan to invest Rs.1.2 lakh in a mutual fund in a year. You can either invest the lump sum at the beginning of the year or Rs.10,000 monthly through SIP. However, if the fund grows 15%, your corpus will see real growth only if you choose to invest the whole money in one go.
Investments in mutual funds as a lump sum could give you greater flexibility regarding the tenure of investments. This is compared to SIP investments, where a more extended period is required for the same to be fruitful. In the case of lump sum investments, you can choose to invest in the medium or long term, according to your investment plan. Here, equities could work best in a longer time frame, while debt funds tend to do better in a medium time frame.
Lump sum investments may be convenient for investors with a significant corpus to park somewhere. This ensures that you need not intervene with investment options, and as long as you invest according to your goals, the same will keep growing if the market allows. But the most significant prerequisite here is the fact that you need to have a significant amount of money to invest in. If your investment makes your budget constrained, then you might be forced to withdraw from it earlier. It may even fail the purpose of the investment.
Below are a few things you should consider when investing a lump sum amount of money in a mutual fund.
Time horizon – Since you are putting in a significant sum of money, the time you invest is of extreme importance. Because of the same, you should ideally find the right entry point. The perfect time for investment is when the fund has the potential to grow further. It is similar to when you invest in a stock. Buying the dip is a strategy that you can employ here. In simple terms, this is when you invest in the fund when it is performing poorly in the hope that it will return to being profitable in the future. The idea here is that while the fund’s performance is not at its best, the unit price would be much lower.
The alternate here is investing in SIPs. Through SIPs, you can invest a smaller amount of money every month to slowly build your corpus. One important thing to understand here is the goals achievable through SIPs are pretty different. Here, the focus is more on corpus building through smaller instalments.
Lump sum investments can appreciate and protect your capital according to your chosen fund. Follow the above pointers to make the best out of your investments.