Lumpsum Investment – Concept, Example, Features, Factors, Downsides & more

Know everything about Lumpsum Investment in Mutual Funds here. For a new investor, investing in a mutual fund can be a huge financial decision.

As an investor, you have the choice to invest through either a Lumpsum Investment or through a Systematic Investment Plan, commonly known as SIP.

Lets get Started & know in detail about Lump sum Investment.

About Lumpsum Investment

A Lumpsum investment refers to investing substantial amount of money at one go instead of breaking it down into multiple installments.

Lump sum investment is a one-time investment preferred by prominent players or investors who have higher risk tolerance.

If you have a considerable disposable amount and a high-taking capability, investing in lump-sum mutual fund investment might be a good opportunity for you.

The lump-sum investment makes use of perfect timing and a good market strategy.

During rising markets, the lump-sum mode of mutual investment tends to offer higher returns, whereas, during falling markets, investments made through SIP mode can yield steadier returns.

A lump-sum payment is the same as the investment, but just in terms of payment that you will receive as a whole amount.

Example of Lumpsum Investment

For example, assume that you get an unexpectedly-large bonus one year. After setting aside a particular amount for your prior commitments, you still have Rs.75,000 left.

While choosing how to invest this amount, you could either take a risk by investing this sum in a single mutual fund scheme of your preference, or you can choose to invest it using installments.

These installments could be of Rs.6,250 that you could invest every month for a year.

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Factors to consider before Investing in Lumpsum

You must have complete knowledge about the risks associated with a lump-sum investment. Here’s a list of factors you should consider before choosing to invest in a lump-sum investment:

Evaluation of Market Timings

Properly evaluating the market trends and previous records can be a tedious task.

Yet, if you can grasp the trends of rising and falling markets over the previous years, it’ll give you a more clear scenario of the market situations.

Patience

The amount of patience you have is one of the essential factors to consider while investing in lump-sum investments.

Investing in a risky manner over a long time requires a lot of patience and perseverance.

The temptation to exit from the scheme will arouse from time to time, but with a strong will, you can receive huge returns after the completion of your long investment period.

Liquidity Expectations

Liquidity refers to the extent to which a fund’s holdings can be quickly converted into cash. A lump-sum investment must be able to meet your liquidity requirements.

While markets do fall regularly, there should not be a considerable amount of loss in your investments. If there is, it means that there is a need for better investment plans.

Amount of Investment

If you have a bulk sum at your disposal, investing it in a lump-sum investment is a good way to preserve it and turn it into a larger sum.

On the other hand, for a salaried person who’s trying to inculcate a saving habit, a Systematic Investment Plan might be more suitable.

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Benefits of Lumpsum Investment

Although the Systematic Investment Plan is a safer mode of investment, there are various benefits an investor can enjoy using the lump-sum method of investment. These include:

Complete control of your investments

When you invest in a lump-sum, you have the power to decide on how much to invest and which financial instruments to purchase.

If you are well-experienced with the risks and the disadvantages in this field, you do not need to rely on the judgment of the fund manager, who can also charge you for their professional advice.

Not Time Consuming

Compared to SIPs, a lump-sum investment is significantly more convenient for individuals who don’t have the time to regularly check on their profits.

Through SIP, an investor has to carefully invest a particular amount at regular intervals, while in a lump-sum investment; investors can simply sit back and watch their investment grow.

Huge Power of Compounding

Simply put, the power of compounding is the interest you receive on your earlier interest. If you invest in the right asset over a long period, the power of compounding is enormous.

For example, through SIP, you can invest as low as Rs.500 per month. This ensures that you are saving money regularly for a long period, but the actual return may not be that high.

However, when you invest using a lump-sum and remain invested for a long time, your return when reinvested continues to earn additional returns.

As a result, you can accumulate an impressive amount of wealth in the long term.

Low Charges

When investing through a Systematic Investment Plan, investors are liable to exit loads and tax implications.

This is absent in lump-sum investments, and they also have lower transaction costs as well as lower maintenance costs.

Market Volatility

If you invest a large amount of sum in one place, your entire amount gets the benefit of an upward rise in markets.

But, if the markets go down, your entire investment could also take a big hit. The key is to hold on to your investment for longer periods to reap greater benefits from your investments.

How is Lumpsum Investment different from SIP?

Lump-sum investments and SIPs are two completely different modes of investments. Here’s a list of points that will help you differentiate between the two:

Modes of Investment

Broadly, there are two modes of investment in mutual funds.

While lump-sum investment allows you to invest a large, bulk amount at a single go, SIP offers to make investments in installments periodically.

These installments can happen daily, weekly, monthly, quarterly, half-yearly, etc., based on your choice.

Time of Investment

Since the two modes of investments are opposite of each other, the time of both the investments is clearly different.

The period of Systematic Investment Plans can vary from open-ended period to close-ended period or even a hybrid.

In the case of a lump-sum investment, the return amount is on lock for a particular period.

Since there are no installments, the amount sum is only a one-time amount, and this sum is unchangeable.

Type of Investors

Many investors consider SIP as the safer mode of investment when compared to the lump-sum investment.

Mainly, beginners or low-risk takers use this mode of investment to avoid huge losses during a market fall.

Investors who are proficient in their game or are extra wealthy choose the lump-sum investment method.

They are usually a lot more experienced and have more knowledge about market fluctuations and the risks associated with them.

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Downsides of Lumpsum Investment

While there are numerous advantages one can enjoy after investing in lump-sum investments, there are a few disadvantages too. These include:

Higher Investment Requirement

While you can begin investing in Systematic Investment Plans with as low as Rs.500, you require at least Rs.5,000 to invest in a lump-sum investment.

This is common for almost all mutual fund companies in India.

Higher Risks

Since an investor has to invest all the sum in one go, he/she may end buying lesser units if there is a market fall.

Plus, there is no option of buying units in-between or regularly. The only option is to invest in a new fund.

It may not even be an option for some investors owing to a single lump-sum payment system. So market timing plays a crucial role while investing through the lump-sum method.

Not ideal for Short-Term Investments

If you’re looking for a short-term investment, the lump-sum investment method might not be a suitable option for you since it takes a long time for the lump-sum investment to yield higher returns.

Lumpsum Investment – Conclusion

Whether to invest using lump-sum investment or SIP method completely depends on you and your requirements. Moreover, investments are highly market-oriented. Y

our choice to invest using either of the methods must be based on your skills and experience as an investor. Also, there is no right time to start an investment as markets cannot be timed perfectly.

Lump-sum investment is a good investment opportunity for high risk-tolerance and experienced investors.

However, it would be better to reconsider this route if a dip in your investments can make you anxious or make you exit the scheme altogether.

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