There are 2 modes available for investing in Mutual Funds. One is the SIP (Systematic Investment Plan) Route. It is perfect when you are saving and investing out of your regular source of income. It may be your salary, business profit or professional fees. Because the income is, more or less, regular, you are able to save on a specific amount on a regular basis.
Due to aggressive marketing and promotions, investing in SIP has become a synonym to the name Mutual Funds becoming a household name. It enjoys the top of the mind recall and makes many believe that to invest in a mutual fund one has to invest a fixed sum monthly.
But what happens when you receive a good chunk of money? Someone gifted you or you inherited a lot of money. Or maybe you got a huge bonus. Enough, that you can hold it for 3-5 years. If not more. In such a case, you make a Lump Sum Investment in Mutual Fund. Putting your Lump Sum into a Mutual Fund Investment can get you significant returns, over a period of 3-years or more. It is also, as a general rule, considered less risky.
Whereas, if you choose to invest in smaller installments, over a longer period of time. If investing in SIP Plan has been the way of life for you. And you have earlier reaped benefits of the Rupee Cost Averaging. Therefore, you find it safe to invest in Mutual Funds via SIP mode.
But investing in Lump Sum will get you higher Returns. This happens due to the Power of Compounding.
Take for instance that you have received an amount of Rs. 5,00,000. A chunk so you don’t want to mess up and lose any of it. We like gains, but we hate losses even more.
Let’s say you earn annually Rs. 6,00,000. That is Rs. 50,000 per month. Out of this, you are able to save Rs. 15,000. And you can set aside Rs. 10,000 from that, to be invested for 3-5 years.
Now if you wish to invest your Rs. 5,00,000 at the rate of your regular savings, i.e. Rs. 10,000 per month. You would be spreading the investment period to over 2-years!!!
Why would you keep your money sitting idly by your side when it’s ready to go out and start working for you? Only because you want to keep it protected?? Wouldn’t that be unfortunate, if you? Would keeping the money at home or in a saving account help you build wealth? A Sip Calculator will tell you exactly how long it will take for the money you have landed up with, to be invested.
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Advantages of Investing a Lump Sum in Mutual Funds
The Rupee Cost Averaging doesn’t guarantee a profit on your investment. It doesn’t protect against losses at the time of market lows, either. Still, most of the individuals prefer saving in Mutual Funds via SIP investment. However, there are many benefits of investing your lump sum in Mutual Funds in India.
Let’s understand the benefits better:
Investing your Large Amount: By opting to invest via lump sum mode, you can put your big amount in Mutual Fund Investment. Consequently, during growth in the market, the investment also sees an increase in value. More than that in the SIP investment, because you may not have completed the payment duration as yet.
Best for Longer Duration Investment: If you can set aside your Lump Sum for a long term, say 5-years or even more, then parking your money in Mutual Fund Investment will bring no harm. And if you can hold it for a tenure of 10-years, then the gains would be huge. Even, for 3 to 5-years, putting your lump sum in Debt Mutual fund investment is advisable.
Ease of Investing: If you are like me and the other 90% of the general public. And forget to pay the bills till we get a reminder. Or hit the snooze button on the reminders we’ve put on the phone. Or are you busy at some important meeting with the boss or clients? Lump-Sum mode is so much convenient, then. It needs a very regular, careful and steady person who pays the SIP amount, on time every time.
Timing the Market: Investing your lump sum amount in Mutual Funds. At the time when the market is at its low and showing growth potential. This is the time when you can earn the highest returns. However, you should avoid lump sum investment in Mutual Funds at the time when the market is already at a peak. Then you may end up in a loss.
Points to consider
Just remember, the most important factor is that you have a conviction. It takes courage to put money in Equity Funds. And you also must have the ability to hold on to your investments during market fluctuations. An early withdrawal won’t earn you any return. You may even end up losing a part of the investment as expenses and charges.
To be prepared for the market ups and downs, you need to keep some basic elements in clarity, in the mind. Here are a few things which you must keep in mind before putting your Lump Sum in Mutual Fund Investment.
Define your Objective: Investing money with a financial objective in mind. Whether wedding planning, child education, retirement or overseas vacation. This will improve the dedication. And helps with keeping the mind calm and hold your investment even during volatile times.
Duration: All kinds of Mutual Funds have a holding period associated with them. Failing to invest according to the benchmarked time, you may lose money. Hence, you must keep in mind the market lows and highs, to make good your investment in the long run.
If you are sure about that you would not require the amount at least before 3-years. In that case, consider investing in equity funds. 3-years is the average time considered for equity to start yielding good returns. On the other hand, debt funds would be a better option if the liquidity requirement is less than 3-years.
Power of Compounding: If you are young and have a large sum, it is advisable to invest at the earliest. With a long life ahead of you, your stay in the market will be longer as well. And your investment will have more growth potential. The Returns generated will also get invested and earn returns. This is the power of compounding. Let it work for you and not dilly-dally on the decision for too long.
The benefit of parking your Lump Sum first in a Liquid or Short Term. And then switching over to Equity Funds works for you only. The short-term investment will earn a return that would, generally, be higher than that of a Bank FD. Moreover, STP would help you get the advantage of Rupee Cost Averaging. As your money gets gradually shifted into the Equity Mutual Fund.
Many financial planners use STP to re-balance portfolios.
To summarize things, investing your Lump Sum is important. Whether you opt for Lump Sum or STP way is a decision that you can best take. As you are the one who will be fully aware of your financial situation and liquidity conditions. We can only suggest that parking your Lump Sum receipt in a Mutual Fund Investment is the way forward.
If you are a veteran, with the ability to ignore the anxious times of market fluctuations. If you can hold on to your investments despite losses, but profits on the horizon. Then you can opt for Lump Sum Investing. But if you are new to the market. And have lots of cash. Or are entering the market when it is exuberant. Then invest Lump Sum in the liquid fund and start an STP from that liquid fund to the equity fund.
Selecting the best way to plan is much easier than you think. Let us, at WealthBucket, assist you with the best advice and services related to investments. Our services include short term mutual funds, Liquid funds, Debt mutual fund or Large Cap mutual fund. Open your mutual fund account with us & make your money grow exponentially.
Give us a call at +91 8750005655. Or email at [email protected]
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