How invest lump sum mutual funds is always a dilemma for people. The reason is simple, what if you invested money and the market dropped down significantly the very next day.
And If the market drops down then one might lose a significant amount. But at the same time, only equity can give good returns, better than the goods price increase rate ( inflation).
You get me right, in this blog post, we will discuss how to invest lumpsum in mutual funds.
*Before we start there is a disclaimer about debt funds*- you can freely invest money in debt mutual funds because debt Mutual Funds are not market linked and therefore the chances of losing money because of market fluctuations, are not applicable. To understand more about Mutual Funds please watch the video and read the post-https://bestinvestindia.com/mutual-fund-guide/
Here, the term mutual fund is synonymously used for equity mutual funds.
Table of Contents
What are Equity Mutual Funds?
Mutual Fund is an investment scheme where people pool in money (just like other investments) and your money is invested (on your behalf) in stocks, bonds, or other securities. Equity mutual funds invest more than 80% of their money in shares of companies. Depending on the market capitalization of these companies mutual funds are further divided into large-cap, mid-cap, and small-cap mutual funds.
Does equity mutual fund performance depend on the market?
Yes, equity mutual fund performance depends on the market. Higher the market better the return from equity mutual fund and if the market drops down then your return also might reduce.
How to invest lump sum amount in mutual funds?
Prerequisite to invest in mutual funds – You should be KYC compliant to start your investment in mutual funds. To be KYC complaint the complete procedure is given https://bestinvestindia.com/how-to-start-mutual-fund-sip/
Just like, we have traffic rules while driving. Similarly, we have investment rules while investing in mutual funds.
# Investment Time
While choosing equity mutual funds, one thing should be very crystal clear in mind -your investment horizon should be long-term in nature (at least 5 years or more).
If it is lower than 5 years then it’s best to stay away from equity Mutual Funds. Instead invest in debt or debt-oriented hybrid funds.
#Do not invest the entire amount in one Fund
Do not invest the entire amount in one fund. It is always best to divide the amount in 3/4 equity mutual funds. For this you can choose from large-cap equity mutual fund, multi /flexi cap mutual fund, midcap equity mutual fund, small-cap Mutual Funds, hybrid equity funds, dynamic asset allocation fund or sectoral funds or theme based equity mutual funds etc. Here, you can choose the MF category as per your choice and risk-bearing capacity.
#Invest the money in debt fund instead of Equity mutual fund
Now you need to find out the debt fund from the categories like-low duration, ultrashort duration, liquid mutual fund or short term fund of the same AMC.
Invest lump sum amount in debt fund of the respective AMC.
# Start Systematic Transfer Plan
Now comes the role of Systematic Transfer Plan ( STP). In systematic transfer plan, you give instruction to the AMC to transfer fixed amount/ Variable amount to the targetted equity mutual fund.
For example, say you want to invest Rs.200000 in Axis Bluechip fund then you should invest in Axis liquid fund and start STP on weekly/monthly or quarterly basis for quite some time until 2 lac completely get shifted to Axis Bluechip Fund. Read more about STP https://bestinvestindia.com/difference-between-sip-swp-and-stp/
#Benefit of STP Approach
- You do not invest in equity market in one go and because of this you escape from the market volatility.
- Your money get invested on weekly or mobnthly basis and thus if market tumbles down than you might get more number of units and that means more profit.
- At the same time your money is earning a safe and steady return in debt fund too.
- If you follow this appraoch,it saves you from mental tension of market movement.
#Drawback of STP Approach
You have to bear Short term capital gain tax as you will be switching amount from debt to equity. To understand how debt mutual funds are taxed, please read the post https://bestinvestindia.com/mutual-fund-taxation-fy-2019-20/
In case market rises significantly after your investment in debt fund than you might lose market rally.
FAQ
Is it good to invest lump sum in mutual funds?
Yes, it is always good to invest in mutual funds either in lump sum or SIP way. But you have to follow the right practices to reap the benefits from mutual funds. It is just like we take precautions and follow rules while driving, crossing roads and cooking. Similarly we should find out our investment horizon, the risk we can take and diversify our investments. Equity investing is for long term money appreciation. If your horizon is shorter than 5 years than you should choose debt funds instead.
Can I add money in lump sum Mutual Fund?
Whenever you invest in a mutual fund account ( Folio number), you can make investment multiple times either in lump sum or even you can start SIP in same fund. MF folio/account works similar to your saving bank account only. Where you can deposit and withdraw multiple times. It’s your account, you can do anything you want to subject to conditions. In nutshell you can add money in lump sum Mutual Fund.
Which is the best mutual fund for Lump sum investment?
The best mutual fund for lump sum investment is a debt fund only for both equity and debt mutual fund investment. If your investment horizon is lesser than 5 years than you can choose debt fund and if your horizon is more than 5 years than you can choose large cap, multi cap, flexi cap, mid cap, balanced funds etc.
Is it the right time to invest lump sum in mutual funds?
Yes, it is the right time to invest lump sum in mutual funds. Since, we follow a STP strategy. This can help you to Not enter at single point of time in market. This strategy can save one from sudden market drop losses.
