Back to Blog
After you’ve completed your financial planning, you may still have some questions that are left unaswered. Should you invest a lumpsum in mutual funds or should I opt for equity, liquid, or debt funds? What is the best place to invest your lumpsum in? If you are still not sure about how to start investing, then consider the factors below when you plan to invest.
5 things you can consider when you make lump sum investments:
Market Timing –
If you are preparing to invest whilst the market is volatile, it is possible that the value of your investment may go down. Seeing your investment go down over the course of a few days, even by a few percentage points, can be unsettling especially if you have invested a large corpus.
It is advisable to invest in lumpsum in equity funds when the price-earnings ratio is at lower levels. Your investments are safer when P/E levels are low.
Money Market Plan –
A money market fund can earn over 6% interest on an annual basis and they can be a great option to park your funds.
You can also park in debt funds provided you are convinced that inflation and bond yields are headed down rather than up. After all, bond prices are negatively related to bond yields and debt funds are generally underperformers in times of rising rates and rising bond yields.
Long Tenure Investment –
If you are looking for a long-term investment commitment, then a lumpsum investment is a good option for you. The probability of losses is minimised since you avoid short term fluctuations of a volatile market when you’re invested for the long term. The chances of earning higher returns increases when you stay invested for 10 or more years.
Debt Funds –
The potential of equity funds is higher, but they can be volatile due to their dependence on the performance of the market. You can, however, reduce the overall risk by investing in debt funds. Debt mutual funds involve bonds, securities, and other money market instruments. The chances of these instruments failing are considerably less, so your investment is comparatively safer, thereby making debt mutual funds low-risk investments.
Systematic Transfer Plan (STP) –
With an STP, you can invest a lump sum 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 associated with equities by spreading the investment out over a few months rather than investing the entire amount at one point.
Key Takeaways:
- Investing in a lump sum amount can be very rewarding if done right.
- Analyse your financial goals before you invest.
- Make sure that you do not have an immediate requirement of money and are willing to keep your amount locked for the next 7 to 10 years.
If you are not sure, please consult a financial advisor or use an investment calculator to estimate your earnings.
