Are you looking to diversify a huge sum of surplus to enhance your returns? Here’s how lumpsum investment can help you. It is one of the profitable ways of investing in mutual funds. Just by conducting your due diligence on the fund schemes depending upon your risk appetite and preferred financial goals, you can enjoy various mutual fund benefits that this kind of investment route has to offer.
What is a lumpsum investment in mutual funds?
Lumpsum investment is when a single bulk amount is invested one time towards mutual fund investment. It is opposed to disseminating the amount over a time-period like SIP (Systematic Investment Plans). Lumpsum investment in mutual funds usually is preferred by distinguished players and retail investors who specifically depend upon the company stock appreciation for the creation of capital. If you are an investor with a considerable investment amount and a high-risk appetite, a lump sum investment may be a suitable choice for you.
For instance, assume you received an unexpectedly huge bonus on Diwali. After setting aside funds for all pre-planned investments and commitments, you are still left with Rs 90,000 to invest. If you have a high-risk appetite, then you can take the risk of investing this excess amount in a mutual fund in a single go through the lump sum route. Doing so will be way different than investing Rs 7,500 per month for a year. However, lump sum investment is not beneficial during rising markets. Market timing is important during lump sum investment to make the most out of it.
When is the right time to invest in a mutual fund through a lump sum route?
Like it or not, whether you choose to invest in mutual funds online or offline through the lump sum route, factoring in market timing is a crucial factor. For instance, if you invest in a volatile market then it is likely that you might invest and later find your portfolio down by 10 percent. This may be very disconcerting, particularly when there is the involvement of a huge corpus, and you see your investment portfolio depreciate by 10 percent in just a few days. The trick here is to use the market dividend yield ratios or P/E ratios to understand market valuations. For instance, it is extremely safe to invest a lump sum amount in equity mutual funds when the P/E of NIFTY is 12 to 14 rather than to go for lumpsum when the P/E of NIFTY is 22 to 24. The margin of safety is way higher when P/E levels are lower. Also, you should invest when your dividend yield of the index is over 1.75 percent than investing when the yield is less than 1 percent. Thus, market level valuation plays a major role during lump sum decisions.
Here are the best mutual fund categories for lump sum investment to meet your long-term goals
Equity mutual funds
Equity mutual funds invest the majority of their assets in stocks. Such funds are further classified into distinct categories depending upon the market cap of stocks that they invest in. A few of their types include:
- Large-cap mutual funds
They invest at least 80 percent of their assets in top 100 companies by market capitalization.
- Mid-cap mutual funds
They invest at least 65 percent of their assets in the next 150 (101st – 250th) companies by market capitalization.
- Small-cap mutual funds
They invest at least 65 percent of their assets in the companies ranked 251 and above as per market capitalization.
- Multi cap mutual funds
They invest at least 25 percent of their assets in small, mid, and large-cap stocks.
- ELSS (Equity Linked Saving Scheme)
They are popularly called tax saving funds and invest at least 80 percent of their corpus in equity and equity-linked instruments.