Alumpsum investmentrefers to a one-time investment in a particular scheme for a specific duration. Know more about the advantages, and factors that you should consider before opting for lump sum investment.
EXPLORE FUNDS
Lumpsum Investment
EXPLORE FUNDS
4 mins read
30 Mar 2024
In the world of mutual fund investments, 'lumpsum investment' holds considerable importance. Unlike the widely favoured Systematic Investment Plan (SIP) approach, this entails a single investment in a specific mutual fund scheme. If you plan to grow your wealth systematically over time, investing is the way to go. When it comes to investing, there are two types of payment methods- lumpsum and Systematic Investment Plan (SIP). Let us understand what lumpsum investment is, how it works, and its advantages over other forms of investments.
What is lumpsum investment in mutual funds?
A lumpsum investment in mutual funds is a one-time payment made in full at the beginning of an investment period. It is a single, large payment made upfront, without any subsequent payments. It can be made for various purposes, including investments, insurance premiums, retirement plans, and more.Fixed depositsare also generally booked by making alump suminvestment.
How does lumpsum investment work?
The value of a lump sum investment is contingent on the market performance of mutual funds, and there exists a standard formula for estimating its returns. The formula is expressed as:
A = P (1 + r ÷ n) ^ nt
Here, the variables represent the following:
- A: Estimated return
- P: Present value of the invested amount
- r: Estimated rate of return
- t: Total investment duration
- n: Number of times interest is compounded within a year
What are the features of a lumpsum investment?
Here are the key features oflumpsum investments:
- Single contribution: Unlike systematic investment plans (SIPs), which involve regular contributions,lumpsum investments entail a one-time, substantial investment into a mutual fund scheme.
- Immediate deployment: The entirelumpsum amount is deployed in the mutual fund scheme immediately upon investment, providing immediate exposure to the underlying assets.
- Market timing:Lumpsum investors must decide when to enter the market. The timing of the investment can have a significant impact on returns. Entering the market during a favorable period can result in higher returns, but it also exposes investors to market volatility.
- Lower administrative requirements:Lumpsum investments typically have lower administrative requirements compared to SIPs. There's no need for periodic contributions or setting up recurring transactions, simplifying the investment process.
- Higher initial risk: Due to the single, larger investment,lumpsum investors often face higher initial risk. The value of the investment can experience immediate fluctuations, which could lead to substantial gains or losses.
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Investment amount:
- Lumpsum:In alumpsum investment, you invest a substantial amount of money in a mutual fund scheme in a single transaction.
- SIP:With SIP, you make periodic, usually monthly, investments in a mutual fund with a fixed amount.
Market timing:
- Lumpsum:In alumpsum investment, you enter the market at a specific point in time, risking potential market fluctuations.
- SIP:SIP allows you to invest regularly and benefit from rupee cost averaging, buying more units when prices are low and fewer units when prices are high, reducing the impact of market volatility.
Risk management:
- Lumpsum:Lumpsum investments can be riskier due to their sensitivity to market conditions at the time of investment.
- SIP:SIP spreads your investment over time, helping manage market risk and reducing the impact of market volatility.
Investment discipline:
- Lumpsum:Lumpsum investments do not necessarily enforce a disciplined approach to investing.
- SIP:SIP promotes discipline, as you commit to regular investments regardless of market conditions, fostering a systematic and long-term approach.
Initial investment size:
- Lumpsum:Alumpsum investment usually requires a larger initial amount, which may not be feasible for all investors.
- SIP:SIP allows you to start investing with a smaller initial amount, making it accessible to a broader range of investors.
Which will give better returns –lumpsum or SIP?
The answer to this question depends on various factors, such as the investment period, market conditions, and the type of investment. While bothlumpsumand SIP investmentsmay offer good returns, the returns from lump sum investments tend to be higher over the long term. This is because it allows the investor to take advantage of the market's ups and downs, leading to a better return on investment (ROI).Using the SIP calculator and Lumpsum Calculator to assess the suitable investment approach aligned with your future objectives. With this knowledge, you can make an informed decision between SIP and lumpsum, selecting the more advantageous option.
Advantages of lumpsum investment over SIP
Some of the advantages of lumpsum investment over SIP include:
- Higher returns:Alumpsum investment offers higher returns over the long term. This is because the entire amount is invested upfront, and the investor can take advantage of the market's fluctuations.
- Lower costs:It helps save on transaction costs since there is only one transaction and also lower investment management fees, as compared to SIP investments.
- Flexibility:Alumpsum investment provides more flexibility in terms of the investment period, as the investor can choose the period according to their financial goals.
How to invest in mutual with lumpsum payment?
- Visit the Bajaj Finserv website or download the app from Google Play Store or App Store
- Navigate to 'Investments' and click on 'All Investments' on the home page
- Click on 'Mutual Funds' icon
- Click on 'Explore Funds'. You will be redirected to the mutual funds listing page
- Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list
- All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating
- Click on 'Invest Now'
- Enter your mobile number and sign in using the OTP
- Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video
- Enter your bank account details
- Upload your signature and provide some additional details to continue
- Choose and select the mutual fund that you want to invest in
- Choose yourinvestment optionas lumpsum and enter the investment amount. Click on ‘Invest Now’
- Select your payment mode i.e., net banking, UPI, NEFT/ RTGS
- Once your payment is done, the investment will be complete
Your investment will start reflecting in your portfolio within 2-3 working days.
Factors to consider before investing in lumpsum investment
Before investing alumpsum amount, consider the following factors:
- Risk tolerance:Lumpsum investments come with a higher level of risk, and it is essential to consider your risk tolerance before investing.
- Investment goals:Determine your investment goals and choose an investment product that aligns with them.
- Market conditions:Study the market conditions and choose an investment product accordingly. It is also essential to keep track of the market and make necessary changes to your investment portfolio when required.
- Time horizon:Consider your investment period and choose an investment product that suits your time horizon.
Conclusion
Individuals can make mutual fundinvestmentsby regularly investing in a SIP. You can also make alumpsum payment whenever they receive windfall income or a bonus. Closed-ended mutual fund schemes only accept a lumpsum investment. In this, the entire investment is made up front. Investors can choose the mutual fund scheme according to their financial goals and invest the entire amount in one go.Lumpsum mutual fund investments come with a higher level of risk, but they also offer the potential for higher returns over a period.
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Frequently asked questions
What is the return rate of lumpsum?
While the value of the return on a lump sum mutual fund investment relies on market performance, all lump sum calculators utilise a formula to determine the value of returns on lump sum investments. The compound interest formula is used to calculate your return.
The formula is:
A = P (1 + r/n) ^ nt
Wherein,
A = estimated return
P = Present value of invested amount
r = estimated return rate (%)
t = overall investment duration
n = number of times the interest is compounded
You can also use the Bajaj Lumpsum Calculator to calculate potential returns
Is lump sum investment good?
For investors with a long-term investment horizon of five to seven years, lump sum investing offers respectable returns. It frequently could assist in achieving particular monetary objectives, such as investing for a child's education fund or a retirement fund. It necessitates a one-time, substantial capital outflow.
Which is more beneficial lumpsum or SIP?
The state of the stock market affects the response to this query. While investing in mutual funds lump sum gives substantially higher returns during bull markets, investing in mutual funds via a SIP typically offers superior returns during bear markets.
What are the different types of mutual fund schemes?
The different types of mutual fund schemes are:
- Equity Mutual Fund Scheme:Invests mostly in equity-related securities and instruments. Equity funds lets you invest in a diversified portfolio which is exposed to different sectors of the economy.
- Debt Mutual Fund Scheme:Invests mostly in capital-appreciating fixed income assets such corporate and government bonds, corporate debt securities, money market instruments, etc.
- Hybrid Mutual Fund Scheme:Invests in both equities and debt to strike a "balance" between income and growth. The regular income from the debt instruments gives the returns on such funds more stability.
How accurately does an investment calculator predict returns?
Investment calculators provide a close estimate of returns, considering various market factors, but actual results may vary due to market fluctuations.
How does someone start making lumpsum investment?
To start a lumpsum investment, one needs to select a suitable investment option, determine the investment amount, and make a one-time payment.
Who can invest in lumpsum mode?
Lumpsum investments are open to anyone with the financial capacity to make a substantial one-time investment.
How much NAV is considered good in lumpsum investment?
There isn't a fixed "good" NAV for lump sum investments; it depends on the fund's historical performance, investment goals, and market conditions.
What are the disadvantages of lumpsum investment in mutual funds?
Lumpsum investments in mutual funds lack the benefit of cost averaging and can be subject to market timing risks. Additionally, a large initial investment may lead to higher exposure to market fluctuations compared to periodic investments.
Can I convert lumpsum to SIP?
Yes, you can convert a lumpsum investment into a Systematic Investment Plan (SIP) by redeeming the lumpsum units and reinvesting the proceeds in an SIP. This strategy allows for gradual investment and can help manage market volatility and timing risks.
Can I add more money in lumpsum mutual fund?
Yes, you can add more money to a lumpsum mutual fund investment by making additional lumpsum contributions. This allows for flexibility in increasing your investment exposure according to your financial goals and market conditions.
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