Everyone has some certain goals that they wish to achieve in their lives. It can be as simple as buying the latest gadget or going on a shopping spree to big ones like buying a house or funding for your child’s higher education. Whatever may be your financial goals, mutual fund investments can help you achieve the same. For investors new to the investing world, you can either make a one-time lumpsum investment in mutual funds or break your investments into several parts through SIP (systematic investment plan) mode of investment. In this article, we will focus on how to invest in mutual funds through lumpsum mode of investment. Let’s quickly recall what a lumpsum investment is.
What is a lumpsum investment?
When an investor opts to invest in mutual funds by entirely investing the investment amount in one go, they are known to make a lumpsum investment. Generally, an investor makes a substantial investment when they choose to opt the lumpsum mode of investment. This mode of investment may be ideal for someone who has a substantial sum of money lying around. This sum of money could be in the form of tax rebates, payment arrears, court settlements, sale of investments, lottery, inheritance, retirement fund, etc.
How to invest a lumpsum amount in mutual funds?
If you are looking to invest a lumpsum sum of money in mutual funds, here are a few tips that can help you with the same:
- Invest for a longer duration
Lumpsum investments might offer their maximum potential when invested for a prolonged duration of 10 years or more. This is because over a long duration, the volatility associated with mutual fund investments tend to average out. This is especially true for equity mutual funds. When you stay invested for a long duration, the chances of an investor incurring huge losses gets diminished. Hence, experts often advise their clients to stay invested for a longer duration to even out the uncertainties in the stock markets.
- Be wary of timing the markets
When you make a lumpsum investment in mutual fund investments, it is important that you are careful about the entry and exit time on your investments. This is because, unlike SIP investments, lumpsum investment do not offer investors the benefit of rupee cost averaging. Experts advise investors to make a lumpsum investment when the markets are down and are expected to rise in the near future.
As with any investments, it is a good idea to diversify your investments even while making a lumpsum investment. You might choose to invest your funds across location, sectors, and asset classes according to your investment portfolio.
- Systematic transfer plans (STP)
You can also choose to make a lumpsum investment in mutual funds through STP mode of investment. STP allows investors to make a lumpsum investment in one type of investment such as debt funds and then systematically transfer their funds to another type of investment, say equity mutual funds. This helps to minimize the risk of timing the markets by spreading the investments over a period of few months rather than making a one-time investment.