Lump-Sum Investment In Mutual Funds – Formula, Features and How to Invest
Lump sum investment is a method of investing in mutual funds where an investor invests money in a single large payment. For example, if an investor decides to invest Rs. 60,000 in mutual fund in one go instead of investing Rs. 5000 per month in a particular year. Many investors prefer a lump sum route as it involves lesser variables and has the potential to offer higher returns.
If you are considering investing in mutual funds via lump-sum payment mode, here’s everything you need to know about it. Keep reading!
What Are Lump Sum Mutual Fund Investments?
A lump sum investment in mutual funds is defined as an amount that is paid in one go to purchase units of a mutual fund scheme. Such investments are made once instead of being done periodically.
Individuals who wish to invest a considerable portion of their disposable cash all at once can choose to go for lump sum mutual fund investments. Such investments are comparatively easier to track, with returns generally on the higher side.
Features of Lump Sum Investments in Mutual Funds
- One-time payment: The lump-sum investment is a one-time event, and it doesn’t require constant monitoring. Moreover, investors do not have to make payments on a regular basis. Thus, this investment route is ideal for individuals who do not have a fixed source of income.
- Beneficial in the long run: Lump sum investments in mutual funds have the potential to generate high returns in the long term. It is ideal for individuals who have a long-term investment horizon. When the market is in a growth phase, the value of lump sum investments increases significantly.
How does Lump Sum Mode Work?
A lump sum investment’s value depends on the market performance of mutual funds. There is a standard formula for estimating the returns on lump sum investments.
The formula is as follows:
A = P (1 + r ÷ n) ^ nt
The variables denote the following:
- A: Estimated return
- P: Invested amount’s present value
- r: Estimated rate of return
- t: total investment duration
- n: number of times the interest is compounded within a year
Example: Mr Singh invests Rs. 60,000 in a mutual fund scheme for 8 years. He expects an average return of 13% per annum. The interest is compounded annually.
The lump sum amount calculation will be as follows:
A = Rs. 60,000 {(1+0.13÷1)^8}
A = Rs. 60,000 × 2.6584
A = Rs. 1,59,504
So, the estimated return for Mr Singh is Rs. 1,59,504.
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What are the Benefits of Lump Sum Investment?
Some advantages of lump sum mode are as follows:
- Bulk Investment: This route enables individuals to invest a sizable amount. As the market shows an upward movement, the investment value rises exponentially.
- Convenience: A lump-sum mode is a suitable option for those who have a large amount of money to invest. In this case, an individual does not have to make small investments on predetermined dates.
- Chance of Earning Higher Returns: If an individual invests for the long-term, he needs to follow the market fluctuations closely. A person can make a lump sum investment when the market is low but has shown potential for growth. Under this scenario, he is likely to earn higher returns via the lump-sum route.
Who can Invest in Lump Sum Mode?
The lump-sum route is suitable for individuals who wish to make long-term investments in mutual funds. Furthermore, individuals having a large corpus to invest can consider allocating funds via a lump sum.
If you want to make a lump sum investment in mutual funds, you may consider the different funds offered by Navi, such as the Navi Large Cap Equity Fund and Navi Equity Hybrid Fund. Individuals can invest in lump sum amounts in these schemes with an amount as low as Rs. 1,000. They can use platforms such as Groww, Zerodha, Kuvera and INDmoney to start investing.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
How to Invest a Lump Sum Amount in Mutual Funds
Here are the steps to follow if you wish to invest in mutual funds via the lump sum mode:
- Step 1: Open an account on AMC’s official website or an investment platform.
- Step 2: Complete the verification process by providing all the necessary documents and completing the KYC process.
- Step 3: Choose the mutual fund that is best suited to your financial plans and needs.
- Step 4: Select the one-time/lump sum option before investing in the mutual fund.
- Step 5: Enter the amount that you wish to invest. Click on ‘invest’, after which that amount will be deducted from your account.
Lump Sum Investment vs SIP: The Key Differences
The differences between the two investment modes are as follows:
- Systematic investment plans (SIPs) enable investment in mutual funds at regular intervals such as half-yearly, quarterly, and monthly. Conversely, investing in lump-sum means making a one-time investment in mutual fund schemes.
- In the case of investment through the lump sum mode, it might help if individuals know the right time to make an investment. However, through SIP, an individual can invest during various market cycles. Accordingly, he/she does not need to monitor the market movements closely.
Lump Sum Investment v SIP: Where to Invest?
SIPs and lump sum investments differ in many aspects. Some of them are mentioned below:
- Monitoring the market: Lump sum investments do not require constant monitoring; it is a one-time investment. On the other hand, SIPs involve investing a fixed amount periodically. Individuals have to track the market regularly.
- Investment approach: Lump sum investments require individuals to invest a substantial amount at once. On the other hand, SIPs provide flexible investment plans by which investors can invest their money on a monthly, quarterly or yearly basis.
Investors can assess these aspects of SIP and lump sum investments before selecting their preferred payment mode.
Things to Consider Before Making a Lump Sum Investment
Keep in mind these parameters while investing through lump sum:
- Investment goals
- Risk profile
- Past performance of the scheme
- Experience of the fund manager
- A direct or regular plan
- Exit load
- Expense ratio
- Tax implications
Where Can I Buy Mutual Fund Units via Lump Sum?
You can buy units of mutual funds through the lump sum route on various mutual fund investment platforms. Alternatively, you can invest through the website of an Asset Management Company (AMC) directly.
- Mutual fund investment platforms offer a list of mutual fund schemes offered by different AMCs that the investors can browse through to choose the best one for them. After one selects the mutual fund of your choice, he/she can choose the one-time option to go ahead with your purchase.
- Various AMCs like Navi offer the ‘one-time investment’ option. You can simply select the fund you wish to invest in and select the preferred investment mode.
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Final Word
Investors having high-risk tolerance ability and adequate information about the market can consider a lump sum investment in mutual funds. However, individuals must make sure to monitor the market swings carefully. If you are new to investing, opt for SIP mode to invest in mutual funds. However, if you are a seasoned investor and have good knowledge about which mutual funds to invest in, you may choose to lump-sum investment. To get started, visit Navi Mutual Fund now!
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
FAQs
Ans: An investor can start to invest in a fund scheme in these ways:
He/she can submit the duly filled in application form at the branch office of the mutual fund house. He must carry a bank draft or cheque along with him.
He/she can start investing online through the fund house’s website.
He/she can take the help of a financial intermediary (registered with AMFI) to route the investment.
Ans: As per Section 80C of the IT Act an individual can get a tax deduction of up to Rs. 1.5 lakh annually. Individuals can claim tax deduction under Section 80C by investing in Equity Linked Savings Schemes or ELSS mutual funds.
Ans: The investment corpus of a mutual fund scheme is managed by a fund manager. After analysing and researching the market, a fund manager makes decisions about purchasing and selling the underlying assets. Some of the duties of a fund manager include the following:
• Designing funds keeping in mind SEBI regulations
• Using risk management techniques and ensuring portfolio diversification
• Monitoring the growth of the fund
Ans: Exit load denotes a commission or an exit penalty that investors are liable to pay the asset management company if they redeem their units before the completion of a pre-specified timeframe. The main objective of levying an exit load is to reduce the number of withdrawals from the scheme.
Ans: The expense ratio is the yearly fee that all fund houses impose on investors to cover all the expenses incurred for running a particular scheme. These expenses include distribution fees, management fees and advertising costs.
Ans: Any time is the right time to invest in mutual funds via the lump sum mode if you have a long-term investment horizon. In case you invest a large sum of money when the markets have dropped considerably, you can enjoy high gains in a bullish market.
Ans: Lump-sum investments are generally advisable for individuals who have a substantial disposable amount. This could be money they have received from a retirement plan, sale of assets, inheritance or money they have saved over a long period of time.
Investors who wish to invest this bulk amount of money for the long run and avoid the hassles of investing on a regular basis should choose the lump sum mode over SIP.
Ans: The Net Asset Value (NAV) is the unit price of a mutual fund scheme. Investors often time their investments when the NAV is low so that they can sell them when the NAV has peaked and get high returns. A low NAV is often preferred by investors who hope for long-term gains.
However, one must also keep the fund’s past performance, expense ratio and investment tenure in mind for selecting the best mutual fund for lump sum investment.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
