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Lumpsum

As the name suggests, lumpsum refers to making one big payment at one go. In this Article, we will be exploring how this payment works, its features, benefits, risks, and more. We hope this blog helps you see whether this investment mode is the best one for you.

What Is Lumpsum?

A lumpsum payment is a monetary sum paid in one single payment instead of allocated into installments. They are commonly associated with mutual funds. There are two types of investment modes in mutual funds - one is Lumpsum and the other is SIP (Systematic Investment Plans). SIPs are the opposite of lumpsum payments, where individuals make periodic payments in an instrument.

What Is A Lumpsum Investment Mode In Mutual Funds?

When you choose the lumpsum method of investing, a considerable amount of money will be made as a one-time mutual fund investment. This is said to be a lumpsum investment in mutual funds.
The lumpsum method of investing is a popular way of investing in mutual funds. Usually, a lumpsum investment is well suited for investors with a significant disposable sum in hand. On top of that, investors with a determination to lock in a considerable amount of money into their investment choose this method of investing.

What Are The Differences Between Lumpsum & SIPs?

As mentioned above, Systematic Investment Plans (SIPs) are the exact opposite of lumpsum investments. Here are some of the major differences between the investment modes.

Mode Of Investment

There are two modes in which you invest in a mutual fund - SIP and lumpsum. When you choose to invest via SIP, the investment is done in installments. The amount will be invested periodically, like monthly deposits of a fixed sum by the investor. However, lumpsum investment consists of a large sum of money invested at a single point. This does not take into account any breakage of the available amount or installments.

Suitable For Bigger Investors

SIPs are considered to be a safe investment instrument. Hence, it is suited mainly for beginners, who have not yet understood the market or are not fully aware of the same. On the other hand, a lumpsum investment is usually favored by the bigger players. They are a perfect choice for those who have been investing for a longer time and have gained good enough experience in the market. The reason lumpsum is a perfect option for experienced investors is that the latter can handle the risks involved with investing a large amount.

Time Period

SIPs provide several schemes of investment to investors. Hence, the time period of those schemes is also different. These schemes can be both open-ended, close-ended, or hybrid. Meanwhile, in the lumpsum mode, the amount is locked in for a particular period of time. Since there is no need for installment, the amount is paid or deposited only once and is hence, fixed.

What Are The Benefits Of Lumpsum Investment?

Here are some of the advantages of investing through the lumpsum method.
Free Of Commitment - When you are investing via lumpsum, you are not committing to future investments. Hence, this can be a preferable investment method for those individuals, who are lacking a fixed income.
Convenience - Like SIPs, lumpsum investments do not require investors to invest periodically at fixed time intervals. A one-time, lumpsum payment can be a hassle-free and straightforward method of investing in mutual funds.
Benefit Of Compounding - Compounding refers to the process where existing returns earned on investments generate extra returns for investors. The benefits of lumpsum investment are particularly realized during bearish market conditions. This happens as investors can purchase more mutual funds at a reduced rate and choose to sell when the markets climb. Thus, you can receive good returns.

How To Get The Best Returns From Lumpsum Mode?

Here is how you can get the best returns when you invest in mutual funds via the lumpsum mode.

Staying Invested For A Long Period

Lumpsum investments are suitable for those investors who are in it for the long term, preferably 10 years or more. If you invest in equity funds via the lumpsum mode, it is better to stay invested for the long term, as stock markets tend to be volatile.
If they are held for a long period, the probability of losses gets reduced and the chances of earning higher returns go up. So, if you stay invested for the long term, it is better for you. But, if you are looking to stay invested only for a short period, then make STP your best friend.

Making STP Your Best Friend

When you invest in debt mutual funds via lumpsum, it can provide you liquidity in the form of Systematic Transfer Plans (STP). But what is an STP? It is a plan where investors can periodically switch or redeem a certain amount or units from one scheme and invest in another scheme of the same mutual fund house.
For example, if you invest ₹1 lakh in an equity fund via an STP, as the first step, you will have to select a debt fund that allows STP to invest in that particular equity fund. Once you select, you should invest the entire amount in the debt fund. Later, you will have the option of transferring the money from debt to equity funds of the same fund house and you can also choose the suitable frequency. In this way, you can reduce the risk of equities by spreading the investment over a few months instead of investing the entire amount at one point.

Invest When It's Down

Let’s be honest here. You can never time the market and even if you invest when the market is down, it is unlikely to predict whether the market will continue to trade lower or go up in the future. Usually, lumpsum investments are advised to be made when the market sectors are in a down cycle but are showing growth potential.
For example, the stock market tends to decline ahead of the Union Budget. In the days before the 2022 budget, the indices fell nearly 7% in seven sessions. Sometimes, the market tends to go through a correction period even after the Budget. In these kinds of situations, you will be able to earn higher returns via the lumpsum mode than the SIP mode. However, if you invest a bulk amount when the markets are up, you might end up with a loss.

What Are The Factors You Should Consider Before Investing Via The Lumpsum Method?

Once you have decided to invest in mutual funds through the lumpsum mode, here are some of the factors that you should consider before you start investing.

Investment Objective

Before you invest in mutual funds, it is important that you know your investment goals. For example, if your goal is to save taxes, you can choose ELSS mutual funds, which offer tax benefits. Therefore, you should have a mutual fund scheme that aligns with your financial goals and objectives.

Expense Ratio

It is important to understand the costs involved in investing in mid-cap mutual funds. The expense ratio is the amount charged by fund houses for managing the fund. SEBI has marked the upper limit for this at 2.25% of the average asset under management. If a fund has a lower expense ratio, you will earn higher returns. So, it is important to choose a fund that has the lowest expense ratio.

Investment Horizon

Always consider your investment horizon before zeroing in on a mutual fund scheme or investment method. The ideal investment horizon is different for equity mutual funds and debt mutual funds. For equity mutual funds, it is recommended to stay invested for 5 to 7 years, while debt mutual funds are ideal as short-term investment instruments.

Investment Risk

Mutual funds are not risk-free investment instruments. Equity mutual funds invest in the stock markets, so your portfolio will be exposed to market risks when you are investing in these funds. Even debt mutual funds, which invest in less risky securities, don’t guarantee returns like fixed deposits. So, before you invest in mutual funds via the lumpsum method, understand the risks you are taking with your money.

Fund Manager's Performance

The experience and expertise of a fund manager can benefit investors who invest in mutual funds. In most mutual funds, fund managers need to actively seek opportunities to diversify the portfolio to reduce risk and align with investment goals. In order to receive all the benefits, investors must analyze the past performance of the fund manager.

Fund Performance

Before you invest in a mutual fund scheme via lumpsum, you must evaluate the fund’s past performance. Mutual fund schemes with consistent performance over the years can be given higher preference. Even though past performance is not an indicator of future returns, you can use it as one of the deciding factors for selecting a scheme.

Which Investment Mode Should You Choose - Lumpsum Or Systematic Investment Plans?

We have explained in detail how the lumpsum method of investing works, the benefits of lumpsum, what are the factors you should consider before investing via this method and so much more. So, what method should you choose - Lumpsum or SIP?
Choosing Lumpsum…
  • With lumpsum mode, you can invest your bonus, cash gift, or a lumpsum amount any time you want and don't need to keep on investing to grow your wealth.
  • You can consider doing an STP (Systematic Transfer Plan) with your lumpsum amount, which means that a certain amount will be withdrawn from your investments and deposited into your bank account.
  • In the lumpsum mode, you can buy low and sell high, which could yield great profits for you.
Choosing Systematic Investment Plans (SIPs)...
  • When you are investing via the SIP mode, you can earn higher returns as the amount is compounded every time you invest.
  • With the SIP mode, you get more units when the market falls, making it a great investment mode to get through market volatility.
  • In the SIP mode, there is no need to time the market, which has to be done for the lumpsum mode.
  • SIPs bring discipline to your financial journey.

In The End…

With the lumpsum mode, you have better control over your investments and earn better returns than investing in an SIP. This mode also gives you the power to benefit from market corrections. The best way to diversify your investments is by putting some money via SIP and some through lumpsum so that you can make returns even during market downsides and it will help you minimize the losses.
Now, you want to invest in mutual funds via lumpsum but want to know how much wealth you would accumulate in a certain number of years. Check our Lumpsum Calculator where you can get a picture of how much wealth you will generate when you invest in mutual funds through lumpsum. Not just Lumpsum Calculator, we have other excellent calculators, such as SIP Calculator, PPF Calculator, EMI Calculator, EPF Calculator, and so much more. Isn’t that awesome?!
If you wish to learn more about Systematic Investment Plans or types of mutual funds, like Equity Mutual Funds, Debt Mutual Funds, Hybrid Mutual Funds, ELSS funds, or other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blogs section.
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