Investing a large sum of money into a mutual fund in one go is called a lump sum investment. While this approach can result in high returns if the market favours the investment, it also exposes investors to risks arising from market volatility. Some important factors need to be considered to maximise the returns from lump sum mutual fund investments.
It is important to carefully select the mutual fund for your lump sum investment. The fund's category, such as equity or debt, its past returns, and investment objective should be reviewed. You must also understand the risk level of the fund and your risk tolerance. Consider top-performing equity funds, be sure to evaluate hybrid funds, consider some of the best debt funds to make the best choice that matches your financial goals and time horizon.
Timing your investment is important when putting in a lump sum amount. As per the documents, market fluctuations can impact returns from lump sum investments if invested during volatile periods. It would be best to wait for market corrections before investing a large amount as this allows purchasing more fund units at lower prices. The documents suggest lump sum investments tend to perform well when made during periods of lower market valuations.
- Using a lumpsum calculator
A lumpsum calculator can help investors estimate the future value of their lumpsum investment over different periods under various growth rate assumptions. This allows them to check if the proceeds will be sufficient to meet their financial goals.
To reduce risks from market fluctuations and underperformance of certain sectors or funds, it is best to spread your lump sum investment across different sectors, market caps and categories of mutual funds. The documents suggest investing in a combination of large, mid and small-cap funds along with hybrid and debt funds. This diversification helps minimise fund-specific and sector-specific risks, as negative returns from some investments can be offset by positive returns from others.
It is generally recommended to hold lump sum investments in equity mutual funds for longer periods to maximise returns. The documents suggest investing lump sums for at least three to five years to benefit from potential market increases over time. Exiting the investment too early deprives you of such upsides. While it can be tempting to exit early to lock in gains, it is advisable to remain invested for the longer term as prescribed by experts.
Conclusion
Carefully selecting the right mutual funds matched to one's goals and risk tolerance, timing the investment to benefit from market downward swings, properly diversifying the lump sum across various asset classes and funds, and maintaining a long-term investment horizon while using systematic withdrawal plans for regular needs can help maximise the returns generated by lump sum investments in mutual funds.