All You Need to Know About Lumpsum Investment   

All You Need to Know About Lumpsum Investment   

Written by Deepak Bhagat, In finance, Published On
February 13, 2023
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Holding a lump sum amount in your hands could make it a little itchy. Given, you would spend it. It is simple to keep the money in a savings account. But how much do you think you would be making off the savings account?

Also, there are a lot of people who might just be too scared to step on the investing plane (given the risks it involves.)

But, as Warren Buffet would say,

– “Be fearful when others are greedy, be greedy when all the others are fearful.”

So, get ready to find out what you can do with your lump sum cash.

What are Lumpsum Investments?

A lump sum investment is a frequent way to invest money in financial instruments such as life insurance, mutual funds, term deposits, and so forth. A lumpsum investment occurs when a significant sum of money is invested in a financial asset in one transaction rather than many smaller payments.

A big proportion of investors prefer to invest in lump sums since they involve fewer transactions and match their risk tolerance.

To understand when you might make a lump sum investment, imagine you receive a wonderful bonus and are left with a sizable sum to invest after paying your pre-planned responsibilities and expenditures. The entire cash can then be invested in a specific lump sum investment plan.

Also, when it comes to lump sum investments – mutual funds are a great way to get going. Remember, when you say lump sum investment, don’t run away trying to look for the best SBI mutual fund for lumpsum investment, the Axis Bank mutual fund lump sum investment, and more – before that, you might want to know a few factors to choose a lump sum investment option.

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What to Know Before Investing Lump Sum in Mutual Funds?

  • Systematic Transfer Plans:

A systematic transfer strategy is a simpler solution to the first two questions (STP). An STP invests the lump payment in a money market fund and sweeps a fixed amount into an equity fund each month. Your idle money generates a higher rate of return as a result, and your equity investment becomes a SIP rather than a lumpsum investment. Why waste time and sleep over capturing market bottoms when you know it’s impossible and futile? Allow your STP to convert lump sum to SIP in auto mode as well.

  • Market Timing:

Whether you like it or not, when you invest a large sum in mutual funds, you must obviously be concerned about market timing. For example, if you invest in the market during a volatile period, it is extremely likely that your portfolio value may fall by another 10%. That can be rather alarming, especially if you have a substantial corpus and your portfolio value drops by 10% in a matter of days. To get a sense of market valuations, consider market P/E ratios and market dividend yield ratios.

  • Waiting for the Perfect Time:

When the P/E and P/BV ratios are below historical averages, it is better to buy in a lump sum than when they are above historical averages. Again, storing your money in a savings account is not a good option because you only get 4% each year. A better option would be to invest the monies in a money market fund that can generate more than 6% annually. That is a better use of idle cash. You can also invest in debt funds if you believe that inflation and bond yields will fall rather than rise. After all, bond prices are inversely proportional to bond yields, and debt funds often underperform in periods of rising rates and bond yields.

  • Look Into the Liquidity Requirements:

Where you deposit your lump sum funds will be determined largely by how soon you require the funds for other objectives. For example, if you want to spend some of this cash to pay your house loan’s margin, that is a significant commitment. You cannot bear the risk of investing that money in stock funds, and you must keep that amount liquid, especially if the funds are needed in the next 2-3 years.

  • Are You Ready for the Long Run?:

That is the fundamental question you must answer before investing a big sum in an equity fund. Your fund may have shown great returns in the previous year and three years, but you should be prepared for the worst. For example, if you had made a lumpsum investment in stock funds at the peak of the equity bull market in 2007, it would have taken at least 7-8 years to earn more than a savings bank account. Of course, if you follow the valuation rule, you are less likely to be caught, but as an equity fund investor, you must be prepared for the worst.

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If you have a time horizon of fewer than seven years, don’t even consider investing in mutual funds, especially equities funds.

What Do You Get Out of a Lump Sum Investment Choice?

Improved Investment Management: When making a lump sum investment, a person can manage the timing of their investment based on their risk tolerance.

Compounding Advantages: The force of compounding can help you profit from the interest you earn on financial products such as fixed deposits.

Investing Only Once: A lump sum investment is a one-time investment in a certain scheme/plan for a set period of time. It is typically chosen by persons with a considerable quantity of money available for investment.

The benefit of convenience: Individuals who desire to invest a large sum of money may discover that making lump sum investments is more convenient.

Profit from Market Cycles: SIP investing in mutual funds allows you to invest a fixed amount regardless of whether the market is bullish or bearish. However, with a lump sum investment, you have more control over your money. For example, if the market is bullish, you can spend the entire available amount to capitalize on any future surge. However, this raises your risk quotient because no one can anticipate when the markets will bottom out and begin soaring again.

Beneficial for People with More Variable Income: SIPs may be the best option for salaried workers or those with a more stable income because they allow you to set aside money each month for investing. However, many people do not have a steady source of income or have an unpredictable source of income. They can invest in mutual funds with a lump sum rather than setting away a certain amount of money each month.

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There are no commitments: With a lump sum investment, you are not expected to make any future investment commitments. For example, if you are a self-employed professional with insufficient funds to invest on a monthly basis, a lump sum investment may be a preferable option.

Make the Most of Your Windfall Profits: Windfall gains like ex-gratia, annual bonus, leave encashment, and so on can be better invested in mutual funds as a one-time lump sum. SIP lets you invest a small amount and leave the remainder in your savings account. However, by making a lump sum investment, you can use the funds to possibly produce larger profits from mutual funds.

Closing Note

However, because markets are unpredictable, no one knows when a bullish or bearish cycle will begin or conclude. As a result – it is not possible to claim that lump sum investments can provide larger returns than SIPs or vice versa. To maximize your results, create a broad portfolio that would align with your financial goals and risk appetite.

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