Lump Sum Investments in Mutual Funds

Investing a large lump sum amount can be an exciting yet overwhelming task. Where do you park such a significant corpus to get optimal returns? While options like fixed deposits and savings accounts provide guaranteed returns, the rates are quite low. This is where mutual funds come in as a smarter investment avenue for lumpsum amounts.

However, mutual funds themselves have various categories and associated risks. How do you identify the appropriate mutual fund scheme for investing your lump sum? 

This article discusses the key factors to evaluate and some of the best-performing mutual funds suitable for lumpsum investments across categories like equity, debt, and hybrid. Read on to make an informed decision for your hard-earned money.

Understanding lumpsum investments in mutual funds  

Lumpsum investment refers to investing a large amount of money, usually above Rs 1 lakh, in one go. Some common sources of lump sum canons are the sale of property, inheritance, retirement benefits, or bonuses at work. Instead of keeping such amounts idle in a savings bank account, investing them in mutual funds can help you earn inflation-beating returns over the long term.

Mutual funds allow you to invest lump sums across various market segments like equity, debt, and gold through different fund categories. You can choose suitable schemes based on the risk appetite and investment horizon. The key benefit of investing a lump sum in mutual funds is that your money gets exposure to multiple securities across sectors. This leads to risk diversification.  

For example, equity funds that invest across large-cap, mid-cap, and small companies can mitigate risk compared to buying individual stocks. Similarly, debt funds are invested across bonds, g-sec, etc., and are issued by governments and companies. This construct helps mutual fund schemes protect against market volatility and downside risks compared to direct stock investing.  

As per the CRISIL 2021 report, if you had invested a lump sum of Rs 50 lakhs in equity funds during the 2008 financial crisis, it would have grown to Rs 2.97 crores by 2021. So, lumpsum investments can create significant wealth if chosen wisely and held for the long term.

Key factors to consider for lumpsum investments

While mutual funds offer portfolio diversification, you must choose an appropriate fund that aligns with your financial goals, time horizon, and risk-taking ability. Here are some key parameters to evaluate:

1. Investment objective: Be very clear about what you aim to achieve from investing the lump sum. Is it for retirement, children’s education, or wealth creation? Your goal will determine which mutual fund category is suitable. For short-term needs, stick to debt funds; equity funds are ideal for long-term growth.

2. Risk appetite: How much risk will you take on your corpus? Equity funds carry higher volatility, while debt funds are relatively safer. Likewise, mid-cap and small-cap equity funds are riskier than large-cap funds but can give higher returns. Assess your risk tolerance to decide on aggressive or conservative funds.

3. Investment horizon: For what duration can you remain invested? Equity funds require longer than 5-7 years to ride out volatility, while debt funds can be redeemed earlier. Match your investment tenure to the appropriate fund.

4. Past performance: Analyse historical returns of the fund over 3-5-year periods. Higher and more consistent returns than the category average indicate a well-managed fund. 

5. Portfolio holdings: Understand where the fund has invested your money by evaluating its top 10 holdings and sectoral allocation. Opt for prudently managed funds.

6. Costs: Check expense ratio, which is the annual fee charged by fund houses. Higher expenses can eat into your returns.

Best mutual funds for lumpsum investments

Here are the top 10 mutual funds across categories that have demonstrated consistent performance along with prudent fund management over the years:

Equity funds

1. Quant Small Cap Fund – 5 Year Returns: 29.69%

2. Quant Infrastructure Fund – 5 Year Returns: 28.38% 

3. Axis Small Cap Fund – 5 Year Returns: 27.22%

Debt funds 

4. Aditya Birla Sun Life Medium Term Plan – 5 Year Returns: 8.91%  

5. Kotak Medium Term Fund – 5 Year Returns: 8.8%

6. HDFC Medium Term Debt Fund – 5-Year Returns: 8.77% 

Hybrid funds

7. Quant Multi Asset Fund – 5-Year Returns: 22.39%   

8. Nippon India Hybrid Equity Fund – 5-Year Returns:  21.17%  

9. Kotak Equity Hybrid Fund – 5 Year Returns: 20.1%

These schemes have demonstrated strong long-term performance, quality portfolio management, and investment processes. Do thorough research based on your financial position and risk tolerance before investing. Combining high-rated equity and debt mutual funds can create optimal risk-adjusted returns on your lump sum.

Tips for lumpsum mutual fund investments

 Here are some handy tips that can steer you in the right direction:

1. Don’t time the markets

Trying to perfectly time stock market highs and lows is impossible. Instead of waiting endlessly for the “right” time, which may never come, invest as soon as you have the lump sum amount handy, irrespective of ongoing market conditions. Rupee cost averaging can help mitigate timing risks.

2. Staggered entry

If concerned about market levels, stagger your outlay over 3-6 months instead of investing the entire amount immediately. Opt for a Systematic Investment Plan after making a partial lumpsum investment. But make sure to let indecision keep you out of the market for a short time.

3. Rebalance regularly

Periodically review your mutual fund portfolio, say every six months, to check if your asset allocation is skewed. Rebalance across equity and debt funds if needed, depending on market movements, to align your portfolio back as per your original target allocation.

4. Build emergency reserves

Before routing large investments into mutual funds, make sure you have sufficient liquid reserves to handle 3-6 months of expenses or any difficulties. These can be parked in savings or liquid funds.

5. Long-term mentality 

Refrain from letting daily NAV movements in your mutual funds influence your decisions since they are bound to be volatile. Have reasonable return expectations and be willing to remain invested for long timeframes for superior wealth creation out of your lumpsum investment amount.

Conclusion

Investing a lumpsum in mutual fund schemes can be a smart financial decision. To do it well, you need to follow these simple steps: do your research, choose your investments wisely, and align them with your financial goals. This will help you make the most of your money and achieve desired outcomes. Remember to stay smart and keep investing!

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