How to Invest a Lump Sum in Mutual Funds

You can invest in a mutual fund periodically through a systematic investment plan (SIP) or invest a large sum of money in one go, i.e., make a lumpsum investment. Although both methods allow you to create wealth, there is one notable difference between them: the frequency of investment. Therefore, both require different mindsets. 

If you have experienced a windfall or inherited a sum of money and you want to generate wealth through it, you can make a lumpsum investment. Follow these tips to ensure that your it is efficient in the long run.

What is lumpsum investment?

Lumpsum investment is a popular way of mutual fund investment that involves investing a large amount of money in a mutual fund in one go. This approach allows you to invest a significant amount at once, instead of breaking it into smaller periodic contributions. 

It is suitable for investors with a substantial amount to invest, especially when they are confident about market conditions and prefer to remain invested for the long term.

Strategies to Use to invest a lump sum in mutual funds

Invest for a long tenure

Lumpsum investments are suitable for individuals who are in it for the long haul, preferably 10 years or more. Suppose you put a large amount of money in equity funds. With the volatile market, they are bound to fluctuate. If the investment is held for a longer tenure, the probability of losses gets reduced and the chances of earning higher returns increases. So, the longer you stay invested, the better it is for you. 

Be mindful of the market timing

With any long-term investment, you should always look for the market's timing. It is advisable to invest when the market sectors are in a down cycle but are showing growth potentials. In this situation, you can earn higher returns through the lumpsum strategy than the SIP strategy. However, the reverse is also true. If you invest a large amount when the markets have peaked, you might end up with a loss.

Additional Read: Timed lump sums vs SIPs: What works better?

Choose debt funds

Equity funds offer a higher return potential. However, they can be volatile due to their dependence on the performance of the stock market. By investing in debt funds, you can reduce your overall risk. 

Debt mutual funds entail bonds, securities and other money market instruments. The chances of these instruments failing are usually less, so your investment is relatively safe, thereby making debt mutual funds low-risk investments.

Consider a systematic transfer plan (STP)

Debt mutual funds also offer you liquidity in the form of systematic transfer plans (STP). With an STP, you can invest a lumpsum amount in debt funds and systematically transfer a small portion of the fund into equity or hybrid funds periodically. In this way, you can minimize the risk of equities by spreading the investment over a few months rather than investing the entire amount at one point. 

Additional Read: SIP or Lumpsum – Which One Should You Opt For?

How does lumpsum investment work?

In a lumpsum investment, the entire amount is invested at once in a mutual fund. The amount buys units of the fund based on the prevailing Net Asset Value (NAV). 

This strategy is useful for investors in a rising market as it allows them to grow all their funds in one go. At the same time, it can involve higher risk in a volatile market as the entire amount is vulnerable to fluctuations.

How is lump sum different from SIP?

Lump sum and systematic investment plan (SIP) are complete opposites in terms of investment style. Here are the key differences between SIP and lumpsum

1. Mode of investment

Lumpsum investment involves a one-time large contribution to a mutual fund, making it ideal for those with a substantial amount of capital. SIP, on the other hand, spreads investments over regular intervals, allowing investors to contribute smaller amounts periodically.

2. Suitability for investors

Lumpsum is suitable for investors who have significant disposable funds and are confident in the market's future performance. These investors are typically comfortable with short-term market volatility. 

SIP is better suited for individuals with a steady income, who prefer disciplined investing. It’s ideal for risk-averse investors or beginners aiming to avoid market timing risks through gradual exposure.

3. Time period of investment

Lumpsum payments are locked in for a particular period of time and the amount is fixed. SIPs offer various schemes to investors, which means the time period for each investment differs. 

Final thoughts

While SIPs are the more popular choice for new investors, investing a lumpsum amount can also be very rewarding if done right. Assess your financial capabilities before you invest. Ensure that you do not have immediate need of money and are willing to keep your amount locked for the next 7 to 10 years. If you are confused, you can consult a financial advisor or use an investment calculator to estimate your earnings. 

Do you have a financial goal you desire to accomplish by a given year? Tata Moneyfy's Mutual Fund app helps you invest your money in mutual funds according to your goals. So download the app, complete your KYC and become investment-ready within minutes.

FAQs

Is lumpsum investment suitable for inexperienced investors?

Lumpsum investment may not be ideal for inexperienced investors due to risks associated with market timing. Investing a lumpsum may mean losing the entire investment during market fluctuations if the investor doesn’t have the market knowledge. 

New investors might prefer SIPs, which spread risk by investing regularly and mitigate short-term market volatility.

What is the difference between lump sum and SIP?

Lumpsum is a one-time investment, while SIP spreads investments over time with regular contributions. Lumpsum is better for those with a large sum, whereas SIP suits those seeking gradual, disciplined investing.

How do I choose between lumpsum and SIP?

You can choose lumpsum if you have significant capital and ability to understand and time the market. However, if you prefer regular, smaller investments and want to reduce market timing risk through rupee cost averaging, opt for SIP.

How does lumpsum mutual fund work?

In a lumpsum mutual fund investment, you invest a large amount in one go, purchasing units based on the prevailing NAV.