While SIP is popular among investors with limited resources for one-time payment, a lumpsum investment is ideal for surplus funds sitting idle in your savings account. SIP’s do not require you to time the market, and your risks through market volatility can be averaged out over the long term. But with a lump sum investment, there are plenty of things you need to be careful about. Let’s take a look at these things.
Lumpsum Investment : 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.
Lumpsum Investment : Timing the market
It is important to time your investment and look for the most opportune moment for maximum returns. If you’re investing in equity mutual funds and if the fund’s NAV has peaked, you may consider holding off from investing with a lump sum. The best time for a lump sum investment in a mutual fund is when the market or the NAV is close to its year’s low and when there’s scope for the fund to start appreciating again soon. It would be advisable for you to park your lump sum in a fixed deposit or liquid fund and wait till the situation suits a lump sum investment.
Lumpsum Investment: 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.
Lumpsum Investment: Do not ignore the tax impact
While investing lump sum amount in the mutual fund, normally people look at the ROI, but they must also look at the tax impact that may erode their absolute gains. Long term capital gain from equity investment (investment for more than one years) is totally tax-free. If you’re investing the lump sum for saving taxes through an ELSS fund, the three-year lock-in on ELSS funds makes your total gains from this investment tax-free.
Lumpsum Investment: Invest as per your financial goal
The main purpose of your investment should be to achieve a financial goal. So while making a lump sum investment, diversify your fund allocation as per your financial goals. If you are investing to save tax, then allocate towards an ELSS fund. In essence, you can divide your lump sum into smaller chunks that you can allocate towards all of these financial goals, thus giving each investment a tiny push towards achieving them.