People new to the investing world often find the terms ‘mutual funds’ and ‘SIP’ synonymous to each other. However, one must not get confused between the two. While mutual funds are an investment vehicle wherein several investors pool their money to earn substantial returns on their investments over a period. On the other hand, SIP (Systematic Investment Plan) is a tool to invest in mutual funds. Just like SIP, there is another tool to invest in mutual funds, namely, lumpsum. Under lumpsum investment, an individual invests the entire investment amount in one go. This method is preferred if you have a sudden influx of cash.
While lumpsum mutual funds are significantly dependent on the market, lumpsum mode of investment allow you to avoid the longer route of SIPs. A lump sum investment has its set of advantages and risks. This article will cover a few factors that you should be mindful of before investing in lumpsum mutual fund investment.
Factors to consider
As an investor, you must consider the following factors before deciding to go forward with lumpsum investment:
Timing the markets
Mutual fund investment is all about tapping the right opportunity. This holds especially true for investments with a significant investment amount such as lumpsum mutual fund. This is why lumpsum investments are often linked to timing the markets.
It is not necessary to invest your entire lumpsum amount in just one investment avenue. You can spread it across different types of investments as well, and you should. Hence, diversify your investments across varying investment options that can help to minimize the risk of loss. Just because you are investing a large amount does not mean that you must invest all of it into one avenue. Hence, when you invest in lumpsum, it is better to divide your money across different mutual funds schemes or diverse mutual fund houses. This minimizes the loss of risk associated with your investments.
Your financial goals
When you invest in mutual funds you must analyze your financial goals carefully. Investing does not have a set path to high returns because it is done with different goals in mind by different people. Hence, your investment plan should be according to your financial goal.
Time to redeem
If you have ever cooked before, you know there is only a limited time that your food should spend on the stove. You remove it too quickly, it’ll be raw. If you remove it too late, it could be overcooked. Both of those situations don’t do you any good. The same applies to lumpsum mutual funds investment as well. Know what the objective of your investment and redeem your gains once you have fulfilled it.
So next time you wish to invest in mutual funds via a lumpsum investments, do not forget these points. What’s more, you can also use a lumpsum calculator to compute the future value of your investments. Happy investing!