How to Make a lump-sum Investment in Equity Mutual Funds

When you invest in mutual funds you are have the choice of investing either a lump-sum amount or through a Systematic Investment Plan (SIP). Unlike the SIP mode, which allows you to automatically invest a fixed amount at regular intervals, the lump-sum mode involves making a one-time mutual fund investment as per your choice.

Generally, the lump-sum mode is popular among investors who have a chunk of investible surplus, and wish to deploy it at an opportune time when the markets have corrected since the peak and valuations look attractive.

Sharp market corrections offer you a valuable opportunity to purchase equity mutual fund units through lump-sum mode. And when the value of units grows over time, you will reap the benefit. So, while the benefits of SIP investment over the long term are well documented and popularised, lump-sum investment has its own benefits.

If you catch the market bottom, lump-sum investment can be fruitful when the market recovers.

Do note that the equity market is often exposed to intensified movements due to the fast-changing world we live in. This makes the investment environment highly unpredictable. Therefore, finding the bottom could be extremely challenging for lump-sum investments.

In view of this, if you are looking to make a one-time mutual fund investment to take advantage of the market corrections, here is how you can do it without exposing the portfolio to high fluctuations:

1) Invest lump-sum in a staggered manner

When you make a lump-sum investment during a market correction, it is advisable to do so in a staggered manner (i.e. in multiple instalments) over a period, say, 3 months, 6 months, 1 year, etc. and not deploy your hard-earned money all at one go. Doing so shall enable you to capture various market levels. If the market declines further after you have made a one-time mutual fund investment, it can make you anxious and even compel you to make hasty decisions. But when you stagger your investments, you do not have to worry about missing the opportunity because you will be able to commit another instalment. This strategy works well if you can actively manage and monitor your portfolio to find attractive favourable entry points.

2) Opt for a Systematic Transfer Plan (STP)

STPs allow you to transfer a fixed amount from the debt scheme to equity schemes at a regular pre-determined interval, such as monthly or quarterly. If you have an investible surplus lying around with you during a market correction but are unsure about the market outlook, you can park the same in short-term debt mutual funds such as a Liquid Fund. You could then set up a Systematic Transfer Plan (STP) to transfer a fixed sum regularly into an equity mutual fund scheme of your choice (within the same mutual fund house). This will enable you to invest in equity mutual funds at different price points automatically without timing the market.

3) Boost your SIP corpus with a lump-sum

If you have ongoing SIPs in equity mutual fund schemes, you can capitalise on market correction as a way to boost your investment corpus. After every sharp correction in the equity market, you may make lump-sum investments in schemes where you have ongoing SIPs.

To conclude...

Whichever option you choose, make sure you have a long-term investment horizon of at least 5 years when investing in equity mutual funds. Never invest your money required to handle exigencies and short-term financial goals into equities.

Since it is difficult to predict the market bottom, it would be better to invest via SIP and make additional lump-sum investments during sharp corrections. Else, you can set up an STP to systematically transfer money from debt funds to equity funds at regular intervals.

And just like with every mutual fund investment, it is important that the scheme that you choose for lump-sum investment aligns with your financial goals, risk appetite, and investment horizon.

Investments through SIP and lumpsum mode are subject to market risk and do not assure a profit or returns or protection against a loss in downturn market.

Above article is authored by Quantum.

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