In recent years, mutual funds have gained a lot of popularity as one of the best options for investment. This is because there are not only a variety of categories to choose from but also the benefit of funds of various risk levels. As per AMFI’s (Association of Mutual Funds in India) industry trends, the AUM (asset under management) of the Indian MF industry has grown from Rs. 6.26 trillion as on December 31, 2010, to Rs. 31.02 trillion as on December 31, 2020, about 5 fold increase in 10 years. This explains the acceptance of mutual funds as a lucrative form of investment. To meet the specific needs of investors, mutual funds offer a variety of investment options such as SIP (Systematic Investment Plan), STP (Systematic Transfer Plan) or lump sum.
However, there is always a dilemma when it comes to SIP vs lump sum. Each mode of investment fulfils a specific purpose. SIP is an economical way if you have long-term investment horizon. Lump sum on the other hand is ideal for short term investments. If you have suddenly gained a huge sum of money and are thinking to invest lump sum amount in mutual funds then you have come to the right place. It is crucial to make a lump sum investment decision at the right time. Nevertheless, how do you decide when is the right time to invest a lump sum in mutual funds? Alternatively, which fund to choose for the investment?
Even though you want to invest in mutual funds via lump sum, your priority should be to protect your capital. Debt mutual funds give you this opportunity. Moreover, lump sum investments should be made if you have a short-term financial goal. It is better to stagger investments in equity funds than a lump sum investment. This is to rule out any possibility of entering the market at a certain time and average the purchase cost. It is also important to see the market condition before investing. A lump sum investment in mutual funds should be done while the market trends are on a rise. The upwards trend gives a relatively higher return.
You can also integrate STP with your lump sum investment. Let us understand this with an example. You have a large sum for investment but you want to take some time to analyse and select the sectors or funds or market trend at a relatively higher level, then you can choose STP. You can put your money in Liquid funds and later transfer to other selected funds through STPs. STPs can also be used to reallocate or realign your portfolio. The STP strategy will depend on factors such as age, need and market valuation.
Make sure to make a calculated decision while investing a lump sum in mutual funds. If you want to get an approximate idea of the returns, then you can use the lump sum calculators available online. However, it is crucial to decide the right time for investment. Happy investing!