Mutual Funds – LumpSum

When you invest in a mutual fund in a lump sum, it means a single, bulk amount locked into a one-time mutual fund investment. This is as opposed to spreading it out over time, like in SIP (Systematic Investment Plans).

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.

Investing in mutual funds through the lumpsum route have some distinct features that you can consider before investing:

1. Minimum investment

Since lump sum means a single investment, the minimum amount that most mutual funds require is Rs.5,000. However, after the initial lump sum investment,usually  you can make subsequent investments in multiples of Rs.1,000 in the same scheme.

2. Time horizon

You can hold a lump sum equity mutual fund investment for a longer time duration. Financial experts suggest a minimum of three years. If your goal is for short-term appreciation, you could consider putting it in a debt fund or liquid fund.

3. Market volatility

If you invest a large amount of money in one place, your investment could take a hit when markets dip. However, the key is to hold on to the investment over a longer period.

Market fluctuations boosting your investment are just as likely as eroding it. The benefits of lumpsum investment are particularly pronounced during periods of a market low. This is because you can buy more mutual fund units at lower prices and choose to sell when markets improve, thereby pocketing a substantial profit.

When you are considering a lump sum mutual fund investment, you can approach a financial advisor to do it on your behalf or contact the asset management company directly. Completing the prerequisites like filling up the KYC form, and submitting documents is essential to creating your mutual fund account.

After this, consider the market situation. Investing a lump sum amount during a market high can lead to significant portfolio devaluations in the future. Instead, wait for a more suitable market condition when valuations are on the lower side.

In the meantime, you could invest the money in a debt fund, a liquid fund, or traditional savings options . Another route to take is to invest in a Systematic Transfer Plan (STP). Through an STP, you can invest the lump sum money in a liquid or market fund, from where a fixed amount will get transferred to an equity fund every month. This is similar to a SIP, but you also stand a chance to make returns from the initial lump sum investment.

As always, do your research and compare various mutual fund schemes before investing. Also, consider your liquidity requirement and your investment goal before funneling in cash.

Conclusion

Lump-sum mutual fund investments are the way to go for experienced investors with a high-risk tolerance and sizeable amount for investment. However, it would be best to reconsider this route if market fluctuations and a dip in portfolio valuations make you anxious.