THINGS YOU SHOULD YOU CONSIDER WHEN YOU ARE INVESTING A LUMP SUM IN MUTUAL FUNDS
When you hear anybody talking about mutual funds, the first thing that crosses your mind is SIP (Systematic Investment Plan). It might be possible that you might be investing in mutual funds via SIP yourself. SIP is a staggering way of investing in mutual funds where you do not have to be worried about timing the markets. In fact, when the NAV (net asset value) of a mutual fund is low you end up buying more units. This is nothing but rupee cost averaging into play.
Let’s assume you have suddenly inherited or received a large amount of money and you want to invest it in one go to secure your future. This is a lump sum investment. You might be wondering which method of investment to choose from SIP vs lump sum. However, before you decide to invest a lump sum in mutual funds, there are few things that you need to consider.
Timing Your Entry Matters Significantly
When it comes to lump sum investments, it is crucial to take into consideration the risk factor. One of which is timing the market. You can use the P/E ratio and the market dividend ratios to understand the market valuations. E.g., if the P/E ratio of Nifty is 12-14 then it much safer to invest lump sum in equity mutual funds. When the P/E levels are lower, the margin of safety is higher. With lump sum investments, market level valuations play a significant role.
It is crucial to diversify your investments
It is advisable to divide your capital among multiple schemes and funds such as exchange-traded funds, mutual funds, etc. If you have allocated money towards a large-cap fund then you can invest in mid-cap equity funds or even debt funds. You will need to diversify your money in a calibrated manner. However, over-diversification might become confusing and make it a difficult task to manage your portfolio.
Decide your financial goal
When we mentioned above to diversify your funds, it should be done as per your financial goals. For e.g, if you have a short-term financial goal then you can invest in liquid funds. They have a low-risk rate and have the flexibility for redemptions. For a mid-term goal, you can invest in balanced funds. If you have a long-term investment goal then you can think of investing in equity funds. If you plan to save tax, then you can invest in an ELSS fund. The idea is to divide you lump sum investment into m=smaller chunks and allocate it towards your financial goals.
When should you redeem your investment?
If you are planning to invest in mutual funds, then it is important to know when the right time to exit the investment is. For this, you should review the investment regularly. If one fund is not performing as you expected, then you can switch to another fund. Keep in mind the charge for exit loads. However, you can stay invested and let the funds perform in long term.
If you have decided to invest your lump sum amount in mutual funds then you can use the lump sum calculator. This can give you an approximate idea regarding the returns of your investment.
As a thumb rule of investing, always ensure that your risk profile, investment horizon, and financial goals are in line with that of your mutual fund investments. Happy investing!