Lump Sum Investments in Mutual Funds
Once you have decided to invest in a mutual fund, the next question that comes to mind is how to go about the investment. An investment in a mutual fund can be made in two ways. One is by making a lump sum payment. The other way to go for SIPs, which involve investing periodically. This piece talks about the first method of investing, which is lump sum investment.
So, let’s begin!
What Is a Lump Sum Investment in Mutual Fund?
Lump sum refers to investing a bulk amount at one go. When individuals opt for this method of investing, a considerable sum is tied with a one-time mutual fund investment, thereby known as a lump sum investment in mutual fund.
In fact, lump sum investment is a popular way of investing in a mutual fund. Generally, a lump sum investment is well suited for investors with a substantial disposable sum in hand. Moreover, investors with a will to lock in a substantial amount of money into their investment opt for this manner of investing.
For instance, you can utilise a major portion of your savings by investing it in mutual funds via a lump sum method.
Now that the definition is clear to you, let’s focus on the features of a lump sum investment plan.
Features and Benefits of Lump Sum Investment
Free of Investment Commitment: Lump sum investments do not compel investors to commit to future investment. Hence, this can be a preferable investment method for individuals lacking a fixed income.
Convenience: Contrary to SIPs, lump sum investments do not require investors to invest periodically at fixed time intervals. A one-time, lump sum payment can, therefore, be a hassle-free and straightforward method of investing in mutual funds.
Benefit of Compounding: Compounding refers to the process where existing returns earned on investments generate extra returns for investors. Lump sum investment allows investors to enjoy the benefits of compounding.
The benefits of lump-sum investment are particularly realised during bearish market conditions. This occurs as investors can purchase more mutual funds at a reduced rate and choose to sell when the market conditions improve. Thus, you can secure optimal profit.
If you have decided to go for a lump sum amount investment in a mutual fund, the following section of the investment process can be a great help.
How to Invest in Lump Sum Mutual Funds?
If you are considering investing a lump sum in mutual funds, you can first take the guidance of a financial advisor. Thereafter, you can choose your preferred type of mutual fund and reach out to its asset management company.
Next, you have to complete the verification process, including filling up the KYC form and providing the necessary documents for initiating the investment.
Furthermore, it is imperative to note here that while selecting a mutual fund scheme, one must consider a number of critical factors. So, let’s now discuss these pointers!
What Are the Factors to Consider Before Investing in Lump Sum Investment?
Before investing, an investor must identify his/her investment objectives. For instance, if your aim is to save on taxes, you can choose ELSS mutual funds, which come with tax benefits. Likewise, make sure that your mutual fund scheme aligns with your financial goals and objectives.
Expense ratio refers to the fees that fund houses charge investors to cover the operating expense of a mutual fund. It is expressed in percentage and tends to range between 2.5%-3%. As it is an additional charge borne by individuals, it increases the overall cost of investment. Therefore, it is important that one checks a scheme’s expense ratio before investing in it.
For any kind of mutual fund investment, it is necessary to consider its associated risks as well as expected returns. Generally, debt funds are considered less risky and offer significant returns. On the other hand, equity funds carry higher risks but generate increased returns. Hence, investors must carefully select a fund based on its risk and returns.
Past Performance of Funds
While investing in a mutual fund via lump sum, investors must choose a fund after evaluating its past performance. Here, mutual fund schemes with consistent performance over the years can be given higher preference. That said, one must also remember that past performance is not an indicator of future returns. So, it should not be considered as a deciding factor for selecting a scheme.
Experience of Fund Manager
While trusting a fund manager with your investment, you as an investor must check the qualification and past performance of this individual. An experienced fund manager should have several years of experience in managing funds through varying market conditions.
This article discussed the ins and outs of a lump sum investment, its features, benefits and more. So, as an investor, you should remember to take these points into account and make an investment as per your investment objective and suitability.