What are Lump Sum Investments?

If you have a large amount of funds available and deposit them in a single investment tool, it is called a lump sum investment. For example, assume you have ₹25,000 and decide to open a fixed deposit (FD) with it, this means a lump sum investment has been made. 

 

Similarly, if you plan to invest a huge amount in money-market instruments such as mutual funds, this is also referred to as a lump sum investment. Simply put, a lump sum is a mode of investment where an individual makes a single transaction rather than multiple, regular payments. 

 

Naturally, lump sum investments require you to have a higher investing corpus to get started, and therein lies a problem. You need time to accumulate the money, and this undertaking alone can pose as a roadblock, unless you gain a sudden windfall.

Investing a huge amount in a single financial instrument has its risks, particularly if you are investing in mutual funds, since they’re vulnerable to market conditions. This is because lump sum investments require you to time the market properly. Failing to do so could result in capital loss down the line. 

 

As such, lump sum investments in mutual funds are generally recommended for seasoned investors. For other instruments that aren’t linked to the market, such as the fixed deposit, a lump sum investment is suitable. This is because these are fixed-income instruments that have low risk exposure.

While investing in market-linked instruments, a lump sum investment may be ideal when the market is bullish. This can help you earn higher returns, considering that the market outlook is likely to improve with time. 

 

However, in a volatile market scenario, there is a huge risk to your invested amount, especially when a large sum is involved. In a turbulent economic climate, a lump sum investment can be ill-advised for regular investors as it poses a high risk of capital loss. Here, a systematic mode of investing offers the benefit of Rupee cost averaging, which is far more efficient. 

 

If you decide to go for a non-market-linked tool, consider opting for lump sum investment with your idle surplus. This amount can vary for each individual, as it is based on your budget and financial obligations. 

 

Instead of leaving a large sum of money in a low-yield savings account, try investing it in a secure, fixed-income instrument like FD. Here, a lump sum investment will help you earn lucrative interest returns rather than having your corpus’ value eroded by inflation.

Before opting for the lump sum investment method, consider its various benefits and drawbacks. 

 

1. Pros  

• Offers convenience as it is a one-time undertaking

• Helps generate better returns with the power of compounding

• Requires you to pay minimum charges 

• Provides options like lump sum investment with monthly income (Post Office Monthly Income Scheme, FD with monthly returns, etc.)

   

2. Cons  

• Market-linked tools like mutual funds face high risk during volatility  

• Requires you to invest a sizeable amount in one go

The option for lump sum mode is available with many investing vehicles, such as equity funds, debt funds, FD, public provident fund, and much more. Each of these options have their own advantages and disadvantages. 

 

To find the best lump sum investment plan for yourself, factor in the pros and cons based on your financial goals. For instance, if the objective is to save on tax, you can invest a lump sum in equity linked savings scheme. Here, you enjoy tax benefits while earning decent returns. 

 

Choosing the right mode of investment is key, and it depends on you. Simply put, lump sum investments in the money market are better suited for seasoned investors. However, novice investors can invest in the same via systematic options.