Lumpsum Investment - Meaning, Benefits and How it Works (2024)

Alumpsum investmentrefers to a one-time investment in a particular scheme for a specific duration. Know more about the advantages, and factors that you should consider before opting for lump sum investment.

EXPLORE FUNDS

Lumpsum Investment

EXPLORE FUNDS

4 mins read

20-May-2024

In the world of mutual fund investments, 'lumpsum investment' holds considerable importance. Unlike the widely favoured Systematic Investment Plan (SIP) approach, this entails a single investment in a specific mutual fund scheme. If you plan to grow your wealth systematically over time, investing is the way to go. When it comes to investing, there are two types of payment methods- lumpsum and Systematic Investment Plan (SIP). Let us understand what lumpsum investment is, how it works, and its advantages over other forms of investments.

What is lumpsum investment in mutual funds?

A lumpsum investment in mutual funds is a one-time payment made in full at the beginning of an investment period. It is a single, large payment made upfront, without any subsequent payments. It can be made for various purposes, including investments, insurance premiums, retirement plans, and more.Fixed depositsare also generally booked by making alump suminvestment.

How does lumpsum investment work?

The value of a lump sum investment is contingent on the market performance of mutual funds, and there exists a standard formula for estimating its returns. The formula is expressed as:

A = P (1 + r ÷ n) ^ nt

Here, the variables represent the following:

A: Estimated return
P: Present value of the invested amount
r: Estimated rate of return
t: Total investment duration
n: Number of times interest is compounded within a year

What are the features of a lumpsum investment?

Here are the key features oflumpsum investments:

Single contribution: Unlike systematic investment plans (SIPs), which involve regular contributions,lumpsum investments entail a one-time, substantial investment into a mutual fund scheme.
Immediate deployment: The entirelumpsum amount is deployed in the mutual fund scheme immediately upon investment, providing immediate exposure to the underlying assets.
Market timing:Lumpsum investors must decide when to enter the market. The timing of the investment can have a significant impact on returns. Entering the market during a favorable period can result in higher returns, but it also exposes investors to market volatility.
Lower administrative requirements:Lumpsum investments typically have lower administrative requirements compared to SIPs. There's no need for periodic contributions or setting up recurring transactions, simplifying the investment process.
Higher initial risk: Due to the single, larger investment,lumpsum investors often face higher initial risk. The value of the investment can experience immediate fluctuations, which could lead to substantial gains or losses.

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Benefits of lumpsum Investment

Advantages of Lump Sum Investment:

Potential for substantial growth: Deploying a large sum at once can result in considerable growth, particularly during bullish market phases.
Tailored for long-term objectives: Lump sum investments align effectively with extended financial goals, facilitating compounded growth over prolonged periods.
Simplified approach: This investment strategy streamlines the process by consolidating investments into a single transaction, eliminating the hassle of managing multiple investment dates.

How to calculate returns on lumpsum investment

Making a significant one-time investment can be a powerful way to boost your portfolio. Bajaj Finserv platform offers tools and resources to help you make informed decisions about lumpsum investing in mutual funds.

Plan your returns: Utilise Bajaj Finserv's Lumpsum Calculator to estimate your potential returns. This user-friendly tool simplifies complex calculations, providing a clear picture of how your investment might grow over time. Simply enter your desired investment amount, expected rate of return, and investment horizon to get started.
Invest with confidence: Bajaj Finserv offers a comprehensive selection of mutual funds catering to various risk profiles and financial goals. Explore their diverse options to find a fund that aligns with your investment strategy.

Strategic use of lumpsum investments

Lumpsum investments offer a way to inject capital into your portfolio, but strategic approaches can help manage risk and maximise potential returns:

STP for gradual entry: Investors with a large sum but hesitant about market timing can utilise a Systematic Transfer Plan (STP). This strategy initially parks the lumpsum in a low-risk liquid fund. Then, regular, pre-defined amounts are gradually transferred into an equity fund of your choice. This allows for a measured approach to entering the market and potentially reduces the impact of market volatility.
Capitalising on market dips: Lumpsum investments can be particularly advantageous during market downturns. By investing when prices are lower, you can purchase more units, potentially benefiting from significant gains as the market recovers. This approach requires some market awareness but can be a powerful tool for long-term investors.

How is lumpsum different from SIP?

A lumpsum investment is when the depositor invests a significant sum of money on a particular mutual fund scheme. SIP or Systematic Investment Plan, on the other hand, entails the investment of smaller amounts on a monthly basis. Both these type of mutual fund investment strategies have their fair share of benefits. Explore How is lump sum different from SIP below:

Investment amount:

Lumpsum:In alumpsum investment, you invest a substantial amount of money in a mutual fund scheme in a single transaction.
SIP:With SIP, you make periodic, usually monthly, investments in a mutual fund with a fixed amount.

Market timing:

Lumpsum:In alumpsum investment, you enter the market at a specific point in time, risking potential market fluctuations.
SIP:SIP allows you to invest regularly and benefit from rupee cost averaging, buying more units when prices are low and fewer units when prices are high, reducing the impact of market volatility.

Risk management:

Lumpsum:Lumpsum investments can be riskier due to their sensitivity to market conditions at the time of investment.
SIP:SIP spreads your investment over time, helping manage market risk and reducing the impact of market volatility.

Investment discipline:

Lumpsum:Lumpsum investments do not necessarily enforce a disciplined approach to investing.
SIP:SIP promotes discipline, as you commit to regular investments regardless of market conditions, fostering a systematic and long-term approach.

Initial investment size:

Lumpsum:Alumpsum investment usually requires a larger initial amount, which may not be feasible for all investors.
SIP:SIP allows you to start investing with a smaller initial amount, making it accessible to a broader range of investors.

Which will give better returns –lumpsum or SIP?

The answer to this question depends on various factors, such as the investment period, market conditions, and the type of investment. While bothlumpsumand SIP investmentsmay offer good returns, the returns from lump sum investments tend to be higher over the long term. This is because it allows the investor to take advantage of the market's ups and downs, leading to a better return on investment (ROI).Using the SIP calculator and Lumpsum Calculator to assess the suitable investment approach aligned with your future objectives. With this knowledge, you can make an informed decision between SIP and lumpsum, selecting the more advantageous option.

Advantages of lumpsum investment over SIP

Some of the advantages of lumpsum investment over SIP include:

Higher returns:Alumpsum investment offers higher returns over the long term. This is because the entire amount is invested upfront, and the investor can take advantage of the market's fluctuations.
Lower costs:It helps save on transaction costs since there is only one transaction and also lower investment management fees, as compared to SIP investments.
Flexibility:Alumpsum investment provides more flexibility in terms of the investment period, as the investor can choose the period according to their financial goals.

A step-by-step guide to invest in mutual funds

Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store

Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page

Step 3: Click on 'Mutual Funds' icon

Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page

Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list

Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating

Step 7: Click on 'Invest Now'

Step 8: Enter your mobile number and sign in using the OTP

Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video

Step 10: Enter your bank account details

Step 11: Upload your signature and provide some additional details to continue

Step 12: Choose and select the mutual fund that you want to invest in

Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS

Step 15: Once your payment is done, the investment will be complete

Your investment will start reflecting in your portfolio within 2-3 working days.

Factors to consider before investing in lumpsum investment

Before investing alumpsum amount, consider the following factors:

Risk tolerance:Lumpsum investments come with a higher level of risk, and it is essential to consider your risk tolerance before investing.
Investment goals:Determine your investment goals and choose an investment product that aligns with them.
Market conditions:Study the market conditions and choose an investment product accordingly. It is also essential to keep track of the market and make necessary changes to your investment portfolio when required.
Time horizon:Consider your investment period and choose an investment product that suits your time horizon.

Conclusion

Individuals can make mutual fundinvestmentsby regularly investing in a SIP. You can also make alumpsum payment whenever they receive windfall income or a bonus. Closed-ended mutual fund schemes only accept a lumpsum investment. In this, the entire investment is made up front. Investors can choose the mutual fund scheme according to their financial goals and invest the entire amount in one go.Lumpsum mutual fund investments come with a higher level of risk, but they also offer the potential for higher returns over a period.

Calculate your expected investment returns with the help of our investment calculators

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SIP Calculator	Lumpsum Calculator	Step Up SIP Calculator
Mutual Fund Calculator	FD calculator	Brokerage Calculator

Frequently asked questions

What is the return rate of lumpsum?

While the value of the return on a lump sum mutual fund investment relies on market performance, all lump sum calculators utilise a formula to determine the value of returns on lump sum investments. The compound interest formula is used to calculate your return.

The formula is:
A = P (1 + r/n) ^ nt

Wherein,
A = estimated return
P = Present value of invested amount
r = estimated return rate (%)
t = overall investment duration
n = number of times the interest is compounded
You can also use the Bajaj Lumpsum Calculator to calculate potential returns

Is lump sum investment good?

For investors with a long-term investment horizon of five to seven years, lump sum investing offers respectable returns. It frequently could assist in achieving particular monetary objectives, such as investing for a child's education fund or a retirement fund. It necessitates a one-time, substantial capital outflow.

Which is more beneficial lumpsum or SIP?

The state of the stock market affects the response to this query. While investing in mutual funds lump sum gives substantially higher returns during bull markets, investing in mutual funds via a SIP typically offers superior returns during bear markets.

What are the different types of mutual fund schemes?

The different types of mutual fund schemes are:

Equity Mutual Fund Scheme:Invests mostly in equity-related securities and instruments. Equity funds lets you invest in a diversified portfolio which is exposed to different sectors of the economy.
Debt Mutual Fund Scheme:Invests mostly in capital-appreciating fixed income assets such corporate and government bonds, corporate debt securities, money market instruments, etc.
Hybrid Mutual Fund Scheme:Invests in both equities and debt to strike a "balance" between income and growth. The regular income from the debt instruments gives the returns on such funds more stability.

How accurately does an investment calculator predict returns?

Investment calculators provide a close estimate of returns, considering various market factors, but actual results may vary due to market fluctuations.

How does someone start making lumpsum investment?

To start a lumpsum investment, one needs to select a suitable investment option, determine the investment amount, and make a one-time payment.

Who can invest in lumpsum mode?

Lumpsum investments are open to anyone with the financial capacity to make a substantial one-time investment.

How much NAV is considered good in lumpsum investment?

There isn't a fixed "good" NAV for lump sum investments; it depends on the fund's historical performance, investment goals, and market conditions.

What are the disadvantages of lumpsum investment in mutual funds?

Lumpsum investments in mutual funds lack the benefit of cost averaging and can be subject to market timing risks. Additionally, a large initial investment may lead to higher exposure to market fluctuations compared to periodic investments.

Can I convert lumpsum to SIP?

Yes, you can convert a lumpsum investment into a Systematic Investment Plan (SIP) by redeeming the lumpsum units and reinvesting the proceeds in an SIP. This strategy allows for gradual investment and can help manage market volatility and timing risks.

Can I add more money in lumpsum mutual fund?

Yes, you can add more money to a lumpsum mutual fund investment by making additional lumpsum contributions. This allows for flexibility in increasing your investment exposure according to your financial goals and market conditions.

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