Mutual funds are a popular investment option, thanks to the ease of investment and their ability to give solid returns if invested properly. There are two ways you can go about investing in mutual funds. The first method works when you have a considerable sum of money to invest in. This is called lump sum investments, and here, you invest the whole money in the fund in one go. The second method is investments through systematic investment plans.
Here, you can invest in instalments to create a bigger corpus.
Both the methods are widely used, and they tend to have different investment goals too. When it comes to lump sum investments, the goal is capital appreciation or protection most of the time. Let us learn more about lump sum investments and see why it could be a good option for you.
Advantages of investing a lump sum in mutual funds
Let us explore some of the advantages of lump sum investments.
Better at taking advantage of the bull market
Investing a lump sum in a fund gives you the ability to better take advantage of the bulls in the market. Here, you are giving more money the potential to grow at once compared to an SIP where only a part of your whole investment is put in every month. Let us take an example to understand this further.
Let us assume that you invested in a fund as both lump sum and through SIP for one year, and the fund gave 15% returns annually. Here, the 15% growth will only be visible for the whole corpus amount in case of lump sum investment. For SIPs, the 15% growth may be limited to the amount that is invested in the first month. While both options are equally valid, a lump sum is better at taking advantage here.
Another important thing to understand here is that since the returns are higher, the chance of risk is higher as well. This is because if the market goes down, your whole investment could go down as well.
One of the biggest advantages of lump sum investments is their simplicity. If you have invested right and for the long term, it doesn’t require any intervention from you constantly. All you need to do is find the right fund and invest. Since there is no further contributions, you don’t need to set up facilities like autopay as well.
Lump sum investments are highly beneficial because of the compounding it provides. In investment terms, compounding is when the returns from your corpus are reinvested into the investment so that the compounded corpus gains returns thereafter.
For instance, if you invest Rs.1 lakh in a mutual fund and the returns from it are Rs.1000 at the end of the day, the compounded corpus of Rs.1.01 lakh will start to earn returns from the next day. In the long term, this can significantly accelerate your corpus appreciation rate.
Since you are putting in a significant sum of money, the time you invest is of extreme importance in the case of lump sum investments. Because of this, you will need to do thorough research to find a good time for investment. The perfect time for investment is when the fund has the potential to grow further, similar to direct stock investments.
Buying the dip is a strategy that you can employ here. This is when you invest in the fund when it is performing poorly in the hope that it will return to being profitable in the future. In short, lump sum investments demand more market research and knowledge than SIPs.