The phrase ‘lump sum’ principally means significant amount of money. In financial terminology, it refers to the investment of a significant sum of money at one go rather than breaking it down into several small installments. Lumpsum investment focuses on investment of entire money which is available to an investor. For example, if an investor plans to invest whole amount which he wants to invest in one go in mutual funds or similar other investment instruments, then this will be referred as a lump sum investment. Lumpsum investment is quite common method of investing money in financial instruments such as life insurance, mutual funds, fixed deposit etc.
Several investors tend to choose lumpsum investments as there are lesser number of transactions which are involved, and suits their risk appetite. In what situation will an investor decide to make a lumpsum investment? Suppose an investor gets a nice bonus, and that investor is left with a handsome amount after paying all the pre-planned obligations and expenditures. Now, that investor might think to invest this amount into a specific lumpsum investment plan.
Benefits of lumpsum investment
A lumpsum investment involves going for a sizeable investment in any financial instrument of your choice. Lump sum investment means a one-time investment in a particular scheme/plan for specific duration. More often than not, this investment option is chosen by those individuals who have large sum of money handy for making huge investments. When someone decides to make lumpsum investment, they can manage and assess the timing of investment according to their risk appetite. Individuals who can invest a large sum of money can find it more convenient to make lumpsum investments.
Apart from the above benefits, another benefit which an investor gets by making lumpsum investment is compounding benefit. However, this benefit is also available if an investor decides to break his/her investment into smaller amounts (i.e., SIP). Power of compounding can help an investor gain profits on the return or interest (as the case may be) he/she receives on investment for financial instruments.
As lumpsum investments can be made for one time, they tend to incur minimum charges in comparison to periodical investments. Lumpsum investments have lower transaction costs and lower maintenance costs.
As already mentioned, lumpsum investments should be made ideally for longer duration. This is because in the long run such investments have enough time to grow in market. Simply put, wealth involved in lumpsum investment tends to get appreciated over long-term. Apart from this, lumpsum investment has the time to adjust to market changes too. Therefore, such investments are capable enough to significantly grow.
What factors should be considered choosing lumpsum mode of investment?
Lumpsum investments tend to take up significant amounts at once. Hence, several investors find it difficult to let go this amount. However, if certain factors are considered beforehand, it becomes easy to face the challenges.
Patience is the first and foremost factor which is most important in such a situation. Patience is one trait which distinguishes investors from traditional traders. Making investment and then waiting for money to grow in the long run needs patience and perseverance.
Focusing on investment returns is the second next important factor to take into consideration. Therefore, it is of utmost importance to assess returns beforehand, so that you get an idea of the scheme in which you plan to invest. It is always advisable to know features of investment plans and also understand relevant returns which can be provided.
Next element which a lumpsum investor should focus on is the liquidity needs. It is the duty of an investor to know that whether or not his/her lumpsum investment will be able to take care of liquidity requirements. However, there should not be any significant loss. Therefore, a lesser loss exhibits a better investment plan.
Another point to keep in mind while making lumpsum investment is understanding the market timing. Therefore, smart investors should use market timing to their own benefit if they invest through lumpsum mode. Whenever there is a fall in the market, they can utilise funds and invest them to buy higher units. Once the recovery happens in the markets, they can sell their investment holdings and walk away with the profits.