You can invest in a mutual fund periodically through a systematic investment plan (SIP) or invest a large sum of money in one go, i.e., make a lumpsum investment. Although both methods allow you to create wealth, there is one notable difference between them: the frequency of investment. Therefore, both require different mindsets.
If you have experienced a windfall or inherited a sum of money and you want to generate wealth through it, you can make a lumpsum investment. Follow these tips to ensure that your it is efficient in the long run.
Invest for a long tenure
Lumpsum investments are suitable for individuals who are in it for the long haul, preferably 10 years or more. Suppose you put a large amount of money in equity funds. With the volatile market, they are bound to fluctuate. If the investment is held for a longer tenure, the probability of losses gets reduced and the chances of earning higher returns increases. So, the longer you stay invested, the better it is for you.
Be mindful of the market timing
With any long-term investment, you should always look for the market’s timing. It is advisable to invest when the market sectors are in a down cycle but are showing growth potentials. In this situation, you can earn higher returns through the lumpsum strategy than the SIP strategy. However, the reverse is also true. If you invest a large amount when the markets have peaked, you might end up with a loss.
Additional Read: Timed lump sums vs SIPs: What works better?
Choose debt funds
Equity funds offer a higher return potential. However, they can be volatile due to their dependence on the performance of the stock market. By investing in debt funds, you can reduce your overall risk.
Debt mutual funds entail bonds, securities and other money market instruments. The chances of these instruments failing are usually less, so your investment is relatively safe, thereby making debt mutual funds low-risk investments.
Consider a systematic transfer plan (STP)
Debt mutual funds also offer you liquidity in the form of systematic transfer plans (STP). With an STP, you can invest a lumpsum 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 of equities by spreading the investment over a few months rather than investing the entire amount at one point.
Additional Read: SIP or Lumpsum – Which One Should You Opt For?
While SIPs are the more popular choice for new investors, investing a lumpsum amount can also be very rewarding if done right. Assess your financial capabilities before you invest. Ensure that you do not have immediate need of money and are willing to keep your amount locked for the next 7 to 10 years. If you are confused, you can consult a financial advisor or use an investment calculator to estimate your earnings.
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