A lump sum refers to a single, substantial amount of money. A lump sum investment involves deploying the entire amount in one go, rather than in smaller, periodic instalments. This method is ideal for those who have access to a large corpus, such as a bonus, proceeds from the sale of property, or substantial returns from earlier investments. By opting for a lump sum approach, you can put the entire amount to work immediately, potentially taking advantage of favourable market conditions. However, selecting the right investment avenue is crucial and should align with your financial goals, risk appetite, and investment time horizon.
In this article, we will discuss where to invest lumpsum amount, the different types of lumpsum investment options and things to consider before making a lumpsum investment.
What are lumpsum investments?
Lumpsum investments are one-time payments made at the beginning of an investment. They consist of a large single payment that is not followed by any other payments within a subsequent period.
Simply put, a lumpsum investment is when a substantial sum of money is invested in one go instead of being divided into parts and then paid in equal monthly instalments.
How does lump sum investment work?
A lump sum investment involves allocating the entire amount into a financial instrument in a single transaction. This approach can be highly beneficial during a bullish market, as the entire investment has the opportunity to grow right from the start. However, it carries a greater risk, particularly in unpredictable markets, as the full amount is exposed to market volatility at the same time.
Who should consider lump sum investments?
Lump sum investments come with specific characteristics, making them suitable for certain types of investors:
1. Incentive earners
If you have received a bonus, a windfall, or extra income, a lump sum investment can be an excellent option. It allows you to invest the entire amount immediately, giving it the potential to grow faster over time.
2. Risk-tolerant investors
For those comfortable with taking risks, lump sum investments offer an opportunity to enter the market during a dip and capitalise on potential gains when it rebounds. However, be prepared for fluctuations in value due to market volatility.
3. Long-term planners
Lump sum investments are ideal for achieving long-term financial goals. They give your investment enough time to ride out market ups and downs, potentially delivering higher returns over the long haul.
Key considerations before making a lump sum investment
If you are planning to invest a significant amount in mutual funds or other instruments in one go, keep these factors in mind:
1. Minimum investment requirement
Many mutual funds have a minimum investment threshold, typically starting at Rs. 5,000. After the initial investment, you can often add smaller amounts, usually around Rs. 1,000, depending on the fund.
2. Investment holding period
For equity mutual funds, a holding period of at least three years is recommended to maximise returns and mitigate short-term market fluctuations. For short-term objectives, consider safer options like debt or liquid funds.
3. Market volatility
Investing a large amount at once means your investment is exposed to market swings. While this carries risk, it also provides the chance to purchase more units during a market downturn, potentially boosting profits when the market recovers.
9 different lumpsum investment options
If you have been asking yourself, “Where should I invest lumpsum money?”, here are a few avenues you should know of to make an informed decision:
1. Mutual funds
Mutual funds have grown in popularity in India over the last decade. They present an attractive investment option for individuals who want a diversified portfolio of stocks, bonds, and shares.
These funds are professionally managed by certified professionals, investment houses, or AMCs. They will understand your investment objective and, depending on that, deploy your funds to the right portfolio. Mutual funds come in different types, such as equity funds, debt funds, and hybrid—a mix of both equity and debt. Investors are advised to choose the fund that matches their financial ambitions and risk appetite.
2. Fixed deposits
Fixed deposits have been the tried and trusted option for Indians to invest their lump sum money for decades. The process is simple; you invest your lump sum amount for a fixed period with a bank or NBFC and get a fixed return for the said time. Fixed deposits are considered a safe and stable investment that provides you with guaranteed returns.
3. Equity shares
Equity shares allow you to own a part of a company and, in return, earn higher interest due to the ownership. They are a good investment option for individuals who want to invest in the stock market.
However, it is important to note that equity shares come with higher risks than most of the other investment avenues specified here. However, investors are also rewarded handsomely if their shares perform well and are compensated for the risks they take. Investors of equity shares should ideally have a long-term outlook on their investment and also have a high-risk appetite.
4. Public Provident Fund (PPF)
Public Provident Fund, or PPF, is the go-to investment vehicle for individuals who want to start saving for their retirement. These are government-backed investment options that give you a tax-free return at a fixed interest rate.
PPFs are ideal for investors who have a low-risk appetite. They are also safe and stable since they are not linked to any market securities. They come with a lock-in period of 15 years and a maximum investment threshold of Rs. 1.5 lakh per annum.
5. Real estate
During FY 2023, the Indian residential real estate market touched new heights, with home sales clocking Rs. 3.47 lakh crore. By 2035, the Indian real estate market is expected to grow to USD 1.5 trillion, contributing around 10.5% to economic output. These projections have made real estate an attractive investment option for investors with lumpsum capital.
Real estate is ideal for individuals who want to invest in physical assets. Once a property has been bought, it provides the opportunity for capital appreciation or regular income through rent. However, an investor should only enter this market if they have a long-term plan or can stomach the high risks that come with this sector.
6. Fixed income products
As the name suggests, fixed-income products provide a fixed return for the entire period of investment. Financial products like bonds and non-convertible debentures that have investment time periods ranging from 2 years to 10 years are some popular fixed-income products. They can also be bought from the secondary markets.
7. Structured products
Structured products are investment strategies that bundle together various financial instruments to meet particular risk-return goals. They are designed to meet particular investment goals that cannot be achieved with standard financial instruments. The minimum amount = you will need to invest is Rs. 1 lakh. It can be invested in either equity or debt and get fixed returns depending on the market conditions.
8. Fractional real estate investment
Fractional real estate investment allows you to own a portion of a property, allowing you to invest in real estate without the need for significant capital. This fractional ownership gives you the chance to invest to get a pie in commercial real estate without investing crores
9. PMS & AIF
PMS (Portfolio Management Services) offers customised portfolio management tailored to individual client financial goals and risk profiles, while AIF (Alternative Investment Funds) facilitates investment in non-traditional assets like real estate, startups, and private equity for potentially higher returns.
The minimum investment amount for PMS is Rs. 50,00,000, while for AIFs, it starts at Rs. 1 crore. Given the high initial lumpsum investment, both these investment options have a high barrier to entry.
Things to consider while investing lumpsum amount in mutual funds
When you decide to make a lumpsum investment, you have to give a lot of thought to multiple factors that can affect your investment in the long term. Make sure you evaluate the following factors before you make a lumpsum investment in any financial instrument.
1. Performance of the fund
Consider the mutual fund’s past performances and track record of the fund you decide to invest in. Make sure you see the benchmarks of the markets and compare them with the fund to understand its growth potential. Although past performances do not guarantee any future results, they still provide significant insights into what you can expect and how the fund will perform in different market conditions.
2. Expense ratio
The expense ratio is the fee charged by fund managers, fund houses, or AMCs for the management of your fund. It mainly covers the cost of different operational activities.
An investor should always be aware of the expense ratio of the fund they decide to invest in as a higher ratio can affect the earning potential of the investment in the long run.
3. Exit load
Exit load is the fee that you have to pay to the AMC or fund house when you decide to sell or redeem your investments, mostly before its maturity period. This fee is charged to discourage short-term trading and to compensate the fund for any potential losses or costs incurred due to the early withdrawal of funds.
4. Market predictions
To get the most value for your capital in a lumpsum investment, investors are advised to time the market, as investing at the right time in the right assets can help you get more returns. So keep an eye out on market trends and conditions well before you plan to make a lumpsum investment.
4. Financial goals
It is important to consider the financial goal you wish to achieve by making a lumpsum investment. Check whether the returns or proceeds that will be generated will be sufficient enough to meet your financial obligations.
Consider, for example, if the goal of your investment is to multiply your capital for the downpayment of a house you wish to buy in the future. Evaluate whether the investment can help you with this.
Lump sum vs SIP investments: Understanding the difference
For first-time investors, choosing between a lump sum and a Systematic Investment Plan (SIP) can be confusing. Here’s a breakdown of the key differences between these two investment methods:
Aspect |
Lumpsum investment |
SIP investment |
Definition |
Involves investing the entire amount at once. |
Allows investment in smaller, regular instalments over a period of time. |
Risk level |
Higher risk, as the entire amount is exposed to market fluctuations at once. |
Lower risk, as investments are spread out, reducing exposure to market volatility. |
Market dependency |
Success depends on timing the market and investing during a low point. |
Benefits from market movements through rupee cost averaging over time. |
Suitability |
Suitable for investors with a large corpus and higher risk tolerance. |
Ideal for beginners and those seeking a disciplined, gradual approach to investing. |
Cost-effectiveness |
Requires a significant one-time amount, which may not suit everyone. |
Affordable for investors with smaller budgets due to instalment-based investing. |
Which offers better returns – lump sum or SIP?
Determining which investment method yields better returns—lump sum or Systematic Investment Plan (SIP)—depends on various factors. Since these two approaches differ significantly, their benefits also vary accordingly.
Investments are inherently influenced by market conditions, making returns unpredictable. In a rising market, lump sum investments often generate higher returns as the entire amount benefits from the upward trend. Conversely, in a declining market, SIPs tend to perform better, as they allow you to invest smaller amounts periodically, taking advantage of rupee cost averaging.
It is important to note that comparing returns directly is challenging because the amount invested, the chosen schemes, and the objectives of each investment method can differ significantly. Both lump sum and SIP investments are designed to cater to different financial goals and risk preferences, making it impractical to declare one as universally superior. Instead, selecting the right option depends on your financial circumstances, goals, and risk tolerance.
Conclusion
Once you have decided where to invest lumpsum amount, carefully understand the different available options in the market. Whichever option you select, make sure it is in alignment with your investment goals, risk-return appetite, and time horizon for maturity.
Each investment option, whether it is fixed deposits, mutual funds, equity shares, or real estate, offers unique benefits and risks. The best strategy is always to diversify your portfolio by selecting different asset classes across sectors to minimise potential losses and maximise returns
