One of the first things that confront you when you’re looking to invest in mutual funds is the question of how to split the payments. Is it better to make a lump sum payment—meaning invest the whole sum at once—or should you make smaller periodic payments? What are the pros and cons of a lump sum investment in mutual funds? And how does it work?
What is a lump sum investment in a mutual fund?
Do you know what investing in a mutual fund in lump sum means? It involves locking a bulk amount into a mutual fund investment via a single transaction. This is the complete opposite of Systematic Investment Plans (SIPs), which let you break up an investment sum into small installments that you can pay periodically. SIPs can be paid on a weekly, monthly, or quarterly basis, but a lump sum is a one-time payment of a much larger sum.
But why would someone choose to invest the larger sum at once when they have the option of a SIP? Well, let’s look at one scenario. Suppose you get a huge bonus each year. After you set the requisite money for all planned investments, you see there is ₹75,000 left over. If you’re up to taking a risk with it because you had no specific plans for the money. In this case, a lump sum investment into a mutual fund might seem like an attractive proposition. Investors who depend on stock appreciation for capital creation may also choose this option.
And what does the process of making a lump sum investment in mutual funds look like? The following steps should give you a fair idea of what to do:
- First, set up an account on the official website of the investment platform.
- Then, submit the documents required to finish the verification process. After that, complete the KYC process.
- Now, your next task is to select the most suitable mutual fund. It is important to pick one that aligns with your financial plans and needs.
- Next, choose the one-time/lump sum option while setting up the investment.
- Finally, start by tapping on the “invest” option. You must enter the amount that you are willing to put in. The money will be deducted directly from your account.
Benefits of lump sum investments
Lump sum investments come with a host of benefits. Here are some of the main ones.
People investing their money only need to pay up once. After that, there is no need for investors to monitor the fund. Again, as an investor, you do not have to manage money too carefully to be able to invest daily. That makes it perfect for people with no fixed income source.
Smarter investment management
If you are willing to invest money in a lump sum mutual fund, make sure you manage the timing of your payments well. Factoring in your risk appetite is a key factor.
People who want to invest a lot of money choose the lump sum mode. Because there is no need to make small investments on predetermined dates, it’s much simpler to manage.
Compounding refers to the reinvesting of interest, so you earn returns on returns. It creates additional returns for investors. Lump sum investors can be benefited from compounding benefits.
How to calculate lump sum investments
When you use a lump sum calculator, you should enter information like the total original investment, estimated rate of return, and time duration. You can use an online calculator to compute estimated investment returns.
Formula to calculate returns on lump sum investments
If you decide to take the manual calculation route, the equation to use is as follows:
X = Y(1+R/N)*NT
- X represents the estimated return,
- Y means the current value of your invested asset,
- R indicates the rate of interest in percentage,
- T refers to the time of the investment, and
- N is the number of times interest is compounded yearly.
Using this formula, if ₹2 lakh is invested in exchange for 12% annual returns for 20 years, based on compound interest, the future value will be ₹19.29 lakh.
How do calculators help with lump sum investments?
Investors can estimate their returns with a lump sum investment calculator. As the calculator is user-friendly, using it should be simple enough. With the help of a lump sum calculator, investors can estimate returns better.
You can start by assessing the potential returns from your investment. The calculator can offer results instantly.
What are the advantages of lump sum mutual fund investments?
These are the benefits of lump sum investments in a mutual fund:
- The benefit of bulk investment: This route allows you to invest a sizable amount, which has a better chance of offering high yields from any upmoves in the market.
- Higher chance of earning good returns: If you create this type of investment when the market is low but has shown potential for growth, chances are that you could go home with high returns. You must study the markets well, though, if this is the advantage motivating you to invest.
Lump sum investments in a mutual fund are ideal for experienced investors. They offer high-risk tolerance and a sizable amount for investment. However, it may be better to reconsider your choice if market fluctuations make you anxious.
1. What is the best mutual fund for a lump sum payment?
Some of the better mutual funds are:
- Canara Robeco BlueChip Equity Fund,
- Baroda BNP Paribas Large Cap Fund,
- UTI Nifty200 Momentum 30 Index Fund,
- Nippon India Credit Risk Fund, and
- HDFC Credit Risk Debt Fund.
However, whether they are suitable for lump sum investing in your case is something we cannot say for sure. Each investor needs to take their own investment objectives, plans, and risk appetite into consideration. Plus, you must do plenty of research on your own before investing.
2. Is it good to invest in a lump sum mutual fund?
These are some advantages if you make a lump sum investment when the market is low. However, you need to know when to exit, and you should be willing to handle a few losses in case things don’t work out.
3. Which is better—SIP or lump sum mutual fund investment?
In volatile markets, SIPs are safer than lump sum investments. However, if you know to time the market and are sure about your analysis, a lump sum investment can offer higher returns.
4. Can I pay for my mutual fund investment as a lump sum every month?
Yes, you can. Most funds allow you to choose any period that works for you. You should be able to choose to pay on a weekly, fortnightly, monthly, quarterly, or even yearly basis.