5 Thoughts To Consider Before You Make A Lump-Sum Mutual Fund Investment

By Adhil Shetty | March 14, 2017

5 Thoughts To Consider Before You Make A Lump-Sum Mutual Fund Investment

Mutual fund investments are a lucrative avenue for investment through a diversified portfolio ensuring risk management, liquidity, high returns and tax efficiency—and even tax-savings under Section 80 C if you’re investing in ELSS mutual funds.

You can invest in Mutual Funds through a Systematic Investment Plan (SIP) or a lump-sum investment. While SIP is popular among investors with limited resources for one-time payment, a lump-sum investment is ideal for surplus funds sitting idle in your savings account.

Related reading: eKYC for Mutual Fund Investment

The following are the factors you must consider when investing a lump sum in any Mutual Fund scheme:

Direct or regular scheme

Direct Mutual Fund schemes are bought online and do not involve the brokers. This eliminates the commission payable to brokers which in turn brings down the expense ratio of the scheme. Regular schemes, on the other hand, require a middleman (broker) and so, their expense ratio is a tad bit higher than direct schemes. Though the difference is low, your absolute returns are higher in direct plans. As a prudent investor, opt for direct schemes for higher returns. Go online, find the Mutual Fund scheme of your liking, choose the direct option and invest online.

Time the market

SIPs follow the principle of rupee-cost averaging and average out the market volatility. In case of lump-sum investments, however, you buy the units only at one price point, which is the prevalent NAV on the day. If the market falls after your investment, the NAV comes down—and you may not be looking to reduce your average which you would in an SIP by buying additional units at lower costs.

On the other hand, if the market improves after your investment, you are at an advantage of having bought a larger number of units at a lower NAV. To be in this advantageous position, you would have to understand the market performance. A lump-sum investment is suited for any time the markets are receding or are at a low. When you feel that the market is at the lowest, invest. If the market improves from that situation as it often does, you would stand to benefit.

Think long-term

When you are investing a lump sum, you must think long term. The markets are hard to predict, and you could easily suffer losses if your investment horizon is short. A long-term investment fetches good returns and saves tax. If you invest in ELSS, you have to hold it for at least three years, which is the lock-in period. With Debt Mutual Funds, you have to stick to them for three years to get indexation benefits on your Long-Term Capital Gains (LTCG).  Equity Mutual Funds have a holding period of 12 months for tax-free returns. However, a longer tenure helps with higher returns. So, think long term when investing a lump sum.

PE Ratio

As discussed above, timing is key to lump sum investments. Various data points can be used to ascertain what constitutes “good” timing. The market PE ratio is one such data point.

Be prepared for bad days

Despite all these calculations, the markets are hard to predict. They might fall in reaction to the many macro-economic, political, or sentimental factors. You should be prepared for such a fall. Since you’ve entered at a single price point with your lump-sum investment, you may take a hit. However, you must have a plan to calmly tackle these situations.

Lump-sum investments in Mutual Funds require careful evaluation of various factors including the market performance. Giving these factors a thought, you may be able to avoid making hasty decisions that could cause losses.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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