The lump sum amount means a single complete sum of money. A lump sum investment means investing the entire amount at one go. Simply put, the word ‘lumpsum’ means a large sum of money. In the world of investing, it means investing a significant amount of money at once instead of breaking it into several installments.
For example, if one wants to invest the entire amount available with him in one mutual fund, it will be termed as lump sum mutual fund investment. Lump sum investment is being regarded as one way of investing into MFs. The other method is a systematic investment plan, known as SIP. Usually, lump sum investments are done by big players and investors. These investments are likely to appreciate over the long term, which makes the investment profitable except during high volatility.
How Lumpsum Investment Benefits Investors?
- Investment of Big Amount: By opting for lump sum mode, individuals get an opportunity to invest a considerable amount in MFs. Thus, when the market shows a growth period, then this results in an increase in investment value to a large extent in comparison to the value of SIP investment.
- Long-term Tenure: Lump sum investment is mainly suitable for individuals preferring to invest on the long-term basis. Long-term investment in case of lump sum investment means an approximate investment tenure of 10 years or above. However, if an investor does a lump sum investment in a debt fund, they can choose to invest for a medium-term tenure.
- Convenience: Lumpsum mode of investment is generally suitable for the individuals who are having a large amount and they can spread their investments. However, if they invest through SIP mode, then they need to understand that the amount gets invested at regular intervals.
- Timing: Whenever the investors decide for the long-term investment, they need to look for the market timing. Lump Sum investors should choose to invest when the markets are in a slump and there are expectations of increase in the levels. In this case, individuals can earn higher returns. Therefore, lumpsum investments are generally preferred by seasoned and experienced investors. These investors have a risk appetite and they can benefit from industry dynamics. However, if the lump sum investment is done during the market peak, individuals might end up having a loss.
- Minimum charges: Since the lumpsum investment is done for one time, the investors incur minimum charges in comparison to the periodical investments. These have lesser transactions and lower maintenance costs.
Factors to be considered before Lumpsum investment
- Parameter for Fund Selection: One of the most important parameters as a reference for lumpsum investment in the mutual fund is the P/E ratio. Since equity mutual funds exhibit collection of shares, examining funds on the basis of P/E ratio can be helpful. P/E ratio of the mutual fund means the weighted average P/E ratio of all the stocks which are present in the fund. The weights of these stocks are ascertained by market values.
Purposive Investment: The purpose of lumpsum investment should be to achieve stated financial objectives. In case the investment is for a short term, it is advised to invest in a liquid fund due to lower risk. This also provides a hassle-free redemption option.