5 CRUCIAL FACTORS TO KEEP IN MIND FOR A LUMP-SUM MUTUAL FUND INVESTMENT
Even though mutual funds are subject to market risks, they are one of the most lucrative, long-term investment options. One of the most economical ways to invest in mutual funds is through Systematic Investment Plans or SIP. However, if you are wondering which method to choose when it comes to SIP vs lump sum, then we are here for you. SIP is an ideal way to invest in equity mutual funds if you have a long-term goal in mind. However, there is also a possibility where you would like to make a lump sum investment as you might have received a large sum of money.
If you are wondering how to invest a lump sum amount in mutual funds then the below pointers might be of help. We have listed down the 5 important factors that you need to consider if you want to invest a lump sum amount in mutual funds.
Let P/E be a benchmark for the fund selection
When you plan to invest in mutual funds, you should try and look at the price per earnings ratio of the fund. You can compute the P/E ratio by dividing the market price per share by its earnings per share. Equity mutual funds are a collection of shares and knowing the P/E ratio can be helpful. Let us understand this with an example. If the market price per share of a stock is Rs. 200 and the earnings per share is Rs. 10, then the P/E ratio will be (200/10) = 20. This means the stock is being traded at 20 times its earnings. When it comes to mutual funds, the P/E ratio is a weighted average of all the stocks in the fund. A lower P/E ratio is preferred from an investment point of view. In this scenario, a lump sum investment is possible as the markets will be at low and one can gain when the markets start to rise.
Strategically Time Your Investment
Now that you have a surplus amount of money and you are looking for a lump sum investment, it is crucial to time it properly. To gain maximum returns, the best time for a lump sum investment in equity mutual funds will be when it’s NAV is at its year’s low. There might also be a possibility to gain when the markets take an upturn. You can procure larger units when the NAV is low.
Determine the Purpose of Your Investment
If you have planned to invest in mutual funds, then you might have some financial goal. If it is a short term goal then you can consider investing the lump sum in liquid funds that have a low-risk exposure and also provide a hassle-free redemption option. If the investment period is mid-term then you can invest in a balanced fund and if the plan is to invest long term then you can choose equity mutual funds. If your purpose is to save tax, then you can invest in ELSS funds that have a lock-in period of 3 years.
Consider the Taxation
Mutual fund investments also involve taxes. Therefore, even though you expect returns, you might also want to think about the taxes. The taxes that you will have to pay on your mutual funds depend on its type, duration and the tax slab you fall under.
Consider STPs or a Systematic Transfer Plan
You can call STP a hybrid SIP. It is a mix of SIP payments and lump sum investment. An STP allows a periodic transfer of amounts or units from one kind of scheme to another in the same fund house. This way you can allocate funds at regular intervals. For e.g., you can remain invested in a debt fund and target investment in an equity fund as well. This way you can ensure high returns from equity and protection from part investment in debt funds.
It is all about making a cautious assessment when you plan to do a lump sum investment. You can also use a lump sum calculator to get an idea of your investment plan. You can also take the services of a mutual fund expert who can guide you through the process of investing. Happy investing!