Summary
Lumpsum investment is one of the ways to invest in mutual funds. But what does lumpsum mean? Read this post to find out.
Content
To begin your mutual fund investment journey, it is essential to master the related terms and jargon. For instance, when you visit financial websites or listen to industry experts talking about mutual funds, one term you commonly come across is “lumpsum investment.”
So, what is lumpsum? Let’s take a look at what it means and what its benefits are-
What Does Lumpsum Mean?
Lumpsum means a substantial amount of money. So, when you invest a large sum of money in one go, you’re making a lumpsum investment. Such lumpsum investments can be made in mutual funds, Fixed Deposits (FDs), life insurance, and many other financial products.
What are Lumpsum Investments in Mutual Funds?
Once you’ve selected a mutual fund scheme based on your risk appetite, investment horizon, and financial objectives, there are typically two ways to invest in the scheme- Lumpsum and SIP.
With lumpsum investment in a mutual fund, you invest your funds earmarked for investments in any mutual fund scheme of your choice. For instance, if you have Rs. 1 lakh to invest, you invest the entire lumpsum amount in a mutual fund in one go.
Systematic or SIP is the opposite of lumpsum investments. With SIP, you make smaller regular investments in mutual funds. For instance, you can invest Rs. 5,000 in any scheme every month.
Advantages of Lumpsum Investments Over SIP
Both lump sum and SIP investments have their benefits. Here are some of the reasons that can make investors choose lumpsum investment over SIP-
Easy to Begin
You only invest once with lumpsum investment in a mutual fund. But with SIPs, you need to keep investing at regular intervals. Thus, many investors may find it an easier option, especially if they don’t want to go through the process of setup involved in SIP.
Zero Commitments
With a lump sum investment, you’re not required to make any commitments for future investments. For instance, if you’re a self-employed professional who does not have surplus funds to invest regularly, a lump sum investment may be a better choice.
Single Maturity
Equity Linked Savings Scheme (ELSS) are tax-saving mutual funds with a 3-year lock-in period. With lumpsum investment, the entire amount invested in an ELSS fund will mature after 3-years of investment. However, if you select the SIP route, each SIP will have individual 3-year maturity.
Utilize Your Windfall Gains
Windfall gains like ex-gratia amount, annual bonus, leave encashment, etc., can be better utilized by making a one-time lumpsum investment in mutual funds. With SIP, you’ll invest a small amount and leave the rest mostly in your savings account. But by making a lumpsum investment, you can use the amount to generate potentially higher returns from mutual funds.
Good for People with More Eratic Income
For salaried individuals or those earning a more predictable income, SIPs may be the way to go as it allows you to set aside some money each month for investment. However, many don’t have a regular income or have an unpredictable income source. Lump sum investment allows them to invest in mutual funds without having to set aside a fixed sum of money every month.
Take Advantage of the Power of Compounding
Timing is of the essence when it comes to compounding. With lumpsum investments, you invest a larger sum of money at once and keep the entire amount invested for a longer duration. As a result, lump sum investment lets you take maximum advantage of compounding.
Take Advantage of Market Cycles
When you invest in mutual funds through SIP, you invest a fixed amount irrespective of whether the market is bullish or bearish. But with lumpsum investment, you have more control over your investment. For instance, if the market is bullish, you can invest the entire available amount to benefit from the potential upcoming rally. However, this also increases your risk quotient as no one can precisely predict when the markets will bottom out and start rallying again.
Can Lumpsum Investments Generate Higher returns Than SIP?
Equity mutual funds are market-linked investments. The returns you generate from your investment, whether through lumpsum or SIP, depending on the market forces. If the markets are rallying, a lump sum investment could prove more profitable as you can maximize the power of compounding advantage. But if the trend is bearish or even volatile, SIPs with their rupee-cost averaging can be more beneficial.
However, as markets are unpredictable, nobody knows the top or the bottom or when a bullish or bearish cycle will begin or end.
Thus, it cannot be said that lumpsum investment can potentially generate higher returns than SIP or vice versa.
To optimize your returns, it is important to build a well-diversified portfolio that aligns with your goals and risk appetite.
Making Lumpsum Investments in Mutual Funds
Investors need to understand what is a lumpsum investment so that they can decide how they’d like to start investing. If you have a large sum of surplus funds that you’d like to invest in mutual funds, a lump sum investment can be a good choice.
But as you’re new to mutual funds, it’d help if you consult with an investment advisor before investing a large sum of money.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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