A lumpsum investment is when you invest a large amount of money in a mutual fund all at once. This is in contrast to a systematic investment plan (SIP), where you invest a fixed amount of money every month.
How does lumpsum investment work?
When you opt for a lumpsum investment in a mutual fund, you are essentially buying units of the fund at the current Net Asset Value (NAV). NAV is the value of each unit of the mutual fund, calculated by dividing the total value of the fund's assets by the number of units issued. Once you invest your lumpsum amount, you'll receive a certain number of units based on the current NAV.
There are several advantages to lumpsum investing in mutual funds.
- Investing large sum of money: If you decide to invest in mutual funds on a lumpsum basis, you can invest a large amount of money. As the market price increases, so does the value of your investment.
- Better option for long term investments: If you can afford to save a lumpsum for at least five years, mutual funds are a better choice; and if you can keep it going for at least ten years, the returns may be substantial.
- Timing the market: The best time to invest your lumpsum money in mutual funds is when the market is at its lowest but showing signs of uptrend and future growth. This is also known as the time when you will earn the maximum as an investor. However, if the market is outperforming and maximizing, lumpsum investments in mutual funds should be avoided as you could end up in a lose-lose situation.
However, there are also some disadvantages to lumpsum investing.
- First, you're exposed to more risk. If the market goes down shortly after you invest, the value of your investments also falls.
- Second, lumpsum investing can be a challenge from the perspective of quantity. It can be hard to part with a large sum of money all at once.
- Third, lumpsum investing may not be suitable for everyone. If you're not comfortable with risk or you need access to your money in the short term, then lumpsum investing may not be right for you.
When is lumpsum investing a good idea?
Lumpsum investing is a good idea when:
- You have a large sum of money that you can afford to invest for the long term.
- You're confident that the market is going to go up in the long run.
- You're comfortable with risk.
- You don't need access to your money in the short term.
How to choose the right mutual fund for a lumpsum investment?
When choosing a mutual fund for a lumpsum investment, you should consider the following factors:
- Market timing: While lumpsum investment offers the potential for immediate gains, it also comes with the risk of entering the market at an unfavourable time. It's challenging to predict market movements accurately, so consider your risk tolerance and investment horizon.
- Diversification: Diversifying your investment helps manage risk. Instead of investing in a single mutual fund, consider spreading your investment across multiple funds to reduce potential losses from a poorly performing fund.
- Research: Before investing, conduct thorough research on the mutual fund scheme you're interested in. Look into its historical performance, expense ratio, fund manager's track record, and the fund's underlying assets.
- Investment goals: Align your investment choice with your financial goals. Different mutual funds cater to different objectives, such as growth, income, or a mix of both. Choose a fund that aligns with your goals.
- Professional advice: If you're unsure about making investment decisions on your own, consider seeking advice from a certified financial advisor. They can help you make informed decisions based on your financial situation and goals. It's important to choose a fund that is suitable for your risk tolerance and investment horizon. If you're not sure which fund is right for you, you should consult with a financial advisor.
Bajaj Finserv Platform has an array of 1200+ mutual funds to choose from. It is an end-to-end online, easy-to-use platform, perfect for comparing funds and checking expected returns with the help of the mutual fund calculator, before investing in the right fund at 0% commission.
Lumpsum investing can be a great way to grow your wealth over the long term. However, it's important to understand the risks involved and to choose the right mutual fund for your needs. If you're considering lumpsum investing, you should consult with a financial advisor to get personalised advice.