If you are successfully done with financial planning, then your financial advisor must have surely explained you the different ways of investing your money in mutual funds. To refresh your memory, there are distinct ways to invest in mutual funds – either you can undertake the systematic and discipline approach of SIP (systematic investment plan) or make a one-time investment through lumpsum investment. Though there are tons of articles on the internet about SIP investment, there’s not as much clarity about lumpsum mode of investment. In this article we aim to cover everything you must consider as an investor before you decide to invest a lumspum in mutual funds.
Factors to consider before investing a lumpsum in mutual funds
Here are several factors that you must consider before you decide to invest a lumpsum amount in mutual funds:
Timing the market
Like it or not, investing in mutual funds through lumpsum requires you to be considerate about the market conditions. For instance, if you invest in the markets during high volatility and at a point where the markets are at its peak, you might end up losing money when the markets go down. And the reverse is true as well. A good investment strategy would be using market ratios – market dividend yields and price-to-earnings (P/E) ratio to get a better understanding of the working of the markets.
Is there a way to stagger your investments to avoid the risks of timing the market?
Yes, there is. You can reduce the risks of timing the market by staggering your investments systematically through SWPs (systematic withdrawal plans). Through SWPs, you can invest a lumpsum in debt funds and then systematically transfer a fixed amount in equity funds at regular intervals. This also allows your idle money to earn returns and your equity investments turns into equity SIP mutual fund instead of equity lumpsum mutual fund. This way of investing is extremely beneficial when investors have realised that aiming to catch the markets at its bottom is difficult task to embark upon that not many can achieve.
How soon will you need liquidity to cater to your other financial goals?
To determine liquidity and how soon you would need the funds is dependent on where you invest your lumpsum amount. For instance, if you wish to pay the installments on a home loan which is an important commitment, you will not want to risk this amount and invest in equity funds. For this matter, you must allocate this portion of your portfolio towards safer investment options such as fixed-income securities. Liquid funds are also a good investment option that have substantially higher liquidity than most types of investments.
Are you ready for the long haul?
This is one of the most basic and primary questions that you must consider before you invest a lumpsum in equity funds. Your fund might have produced promising returns in the past, but you must be prepared for the worst. Also, past performance is not a definitive indicator of future returns on mutual fund investments.
Whether you invest in mutual funds through SIP or lumpsum is dependent on several factors such as availability of funds, investment horizon, risk profile, and financial goals. Happy investing!