Individuals can invest their money in mutual funds either in one go or by making equal monthly/quarterly/half-yearly/yearly payments. It is a lump-sum investment when one invests the whole amount in one shot. Usually, when you get a bonus from your employer, or when you sell an existing asset and are looking to reinvest the amount or you have received a sizeable amount as a gift, you can use this investment method to make the most of the capital appreciation in the medium to long term.
It is a suitable method for individuals with a sizable investment corpus, aiming for wealth accumulation in the long run. Now that you know what lump sum investment is, read on to learn about its features!
Features of Lump Sum Investment
You can find some features of lump-sum investment here:
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Minimum investment amount
This investment method involves a single payment upfront. So, the minimum investment amount is higher than systematic investment planning – SIP. Usually, many fund houses require an initial investment of Rs. 5,000. After the first investment, investors can invest in the same scheme in multiples of Rs. 1,000. Some schemes allow individuals to pay Rs. 1,000 as the initial investment amount.
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Time horizon
Generally, lump sum investments are most profitable when one invests in them while considering their long-term financial goals. This is because investors can expect significant returns over the long run as an appreciation of the value of assets takes time.
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Volatility
Market volatility is part and parcel of mutual fund investments. Through the lump sum method, assets may have their share of pros and cons during market turbulence. However, they are most profitable when markets are low, as you can buy more mutual fund units with the same amount.
How to Make a Lump Sum Investment for Mutual funds?
Mutual fund investors can opt for a lump sum investment through an asset management company directly or online investment platforms like Kuvera. Follow these simple steps with Kuvera to invest in mutual funds in minutes:
Step 1: Download the Kuvera app or visit our website and sign up.
Step 2: Complete your KYC with PAN, Aadhaar, and In-person verification through video. It is mandatory to complete KYC compliance under the Prevention of Money Laundering Act, 2002 and Rules framed there under, read with the SEBI Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries.
Step 3: Select the ‘Invest’ option from “ Home”
Step 4: Select ‘Mutual Funds’, and see the categories listed, or check All Mutual Funds
Step 5: You will be directed to a list of all mutual funds available in Kuvera. By clicking on every mutual fund scheme, you can check its risk profile, net asset value, and past performance. In this section, we have included the performances of its counterparts to help you compare. To be sure, check the exit load and lock-in periods of the mutual fund. This will help you decide if you are ready for a commitment of the mentioned years.
Step 6: Select the MF scheme you want to invest in, and tap on “One Time” for lump sum investments. Enter the amount on the next screen and tap on “Buy now”, or “Add to cart”.
Step 7: Make the payment.
Based on the prevailing Net Asset Value of the Fund, you will soon be allotted units of the mutual fund.
The best time to invest through a lump sum method in mutual funds is when the markets are bearish. This is because it will allow the investors to take advantage of lower NAV and acquire more units of a mutual fund. Individuals can also invest in mutual funds through a broker/distributor. They have to pay a higher expense ratio as the fund house has to pay a commission to the intermediary.
Benefits of Lump Sum Investment
Some benefits of investing through the lump sum mode are as follows:
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High return potential
Lump-sum investment is beneficial for HNIs and institutions having a large investment corpus. They can park their funds with a long-term outlook, and when the NAV of a mutual fund increases, their returns will increase significantly due to a significant initial investment.
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Suitable for long term investment
It is a very suitable option for those having long-term investment goals. It is a suitable investment alternative for investors who believe in significant wealth accumulation over a long time.
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Convenience
Unlike SIP, in the case of the lump sum method, individuals do not have to make regular payments. Individuals can invest at their convenience whenever they have access to a large sum of money.
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Timing
You can use the market timing for your benefit if you are investing via the lump sum method. Whenever the markets are low, you can utilise your funds to buy higher units of mutual funds. After recovery takes place in the markets, you can sell the units and book profits.
Drawbacks of the Lump-Sum Investment Option
Here are some drawbacks associated with lump sum investment:
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Not suitable for small investors
This investment method is unsuitable for small investors who do not have a significant investment corpus. One may have to wait to accumulate a certain amount before starting investing.
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Not suitable for the short term
This investment is not suitable for individuals having short-term financial goals. As the lump sum method will give actual returns only in the long term, it may not meet the investment goals of investors. Individuals having short-term investment objectives can go for debt funds if they have to meet immediate needs.
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Investment timing
The most significant disadvantage of the lump-sum investment method is that individuals may incur heavy losses if they do not get their investment timing right. If an individual buys mutual fund units when markets are at their peak or during a bull run, investors will be able to buy only a few units of a mutual fund scheme. It will be tough for them to realize any significant real return when invested at such high prices.
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Irregular investment
Lump-sum investment method will not make them financially disciplined. As a result, one may not be able to use their regular savings efficiently.
Things to Consider While Going For Lump Sum Investment
It would help if you considered the following factors before opting for a lump sum investment in a mutual fund:
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Return potential
Before investing, one must carefully analyze the returns that a particular mutual fund offers. Individuals must only make a lump-sum investment if the returns offered by the mutual fund scheme are in line with their expectations.
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Fund manager’s performance
A fund manager manages mutual funds. All decisions taken by them directly impact the portfolio quality and return outlook. So, individuals must carefully analyze the manager’s performance before they invest their savings.
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Investment goals
One must make any investment decision only after considering their financial objectives. Individuals must analyze whether the investment is in sync with their short-term and long-term goals. In the case of investing through the lump sum mode, investors will find it beneficial only if they have long-term financial goals, as this method can provide decent returns over a long period.
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Investment corpus
It would help if you considered the investment corpus available before opting for the lump sum route. If you have a significant corpus, a lump sum investment can be a suitable option.
Final Word
Today, one can find several investment avenues which can help one achieve their financial goals. Making a Lump sum investment in the right option can ensure wealth creation over a significant period. However, individuals must consider their investment objectives, risk appetite, investible corpus, and other factors before taking a plunge.
Frequently Asked Questions
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Is SIP better than the lump sum method?
The decision to invest via SIP or lump-sum investments primarily depends on an individual’s investment goals, risk appetite, and available funds. Individuals with a low-risk need and a small investment can go for SIP. However, those with significant savings and high risk-bearing capacity can opt for the lump sum method.
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What is a Systematic Investment Plan (SIP)?
SIP involves investing a fixed amount at regular intervals to buy units of mutual fund schemes. The most significant advantage of SIP is rupee cost averaging.
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What is a Systematic Transfer Plan?
STP is one way to switch from one mutual fund scheme to another. For example, you can transfer a fixed amount to another mutual fund scheme at regular intervals if you have invested in a mutual fund scheme via the lump sum method. The former is the transferor scheme, and the latter is called the destination scheme.
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