Best Mutual Funds For Lump Sum Investment With Better Return Prospects
Today investors have a lot of flexibility for making investments in mutual funds as well as their payments. There are two routes to make payments for mutual fund investment, SIP (Systematic investment plan) and Lump sum. Here lump sum investment attracts a lot of investors' interest, especially prominent investors, and the reason we shall find out in this section with all of the other details.
What is a lump sum investment?
Lump-sum investment means an amount, either small or large, paid in one go instead of dividing it into installments and paying at predefined intervals. With mutual fund investment through a lump sum, you pay the amount all at once in a fund scheme. The lump-sum investment method is preferred highly by prominent investors with high bearing capacity and depends solely on stock appreciation for wealth creation.
Top Mutual funds for lump sum investment in 2022 in India
Some of the well-known lump sum investment plans in India and their returns are shown below:
Direct plan - Growth option
|Minimum Lump sum(Rupees)||AUM(Rs. crores)||1 year(Absolute return)||3 years(CAGR)||5 years(CAGR)|
|Quant small-cap fund||5000||1,664.21||14.99%||36.95%||36.95%|
|ICICI Pru Technology Fund||5000||8,742.31||13.99%||33.52%||27.58%|
|Aditya Birla SL Digital India Fund||1000||3,398.3||8.24%||31.04%||26.82%|
|PGIM India Midcap Opportunities Fund||5000||4,887.32||14.29%||30.49%||17.75%|
|Tata Digital India Fund||5000||5,893.77||12.48%||30.37%||29.18%|
Who should invest in mutual funds through lump sum?
Investors who are well versed with mutual funds and have high risk-bearing abilities prefer lump sum investment. This investment helps investors to take advantage of stock appreciation for wealth generation.
As such, the lump-sum investment method is ideal for investors who have a large corpus to invest in and a high to moderate risk appetite. Also, the investment horizon is a crucial aspect that investors should consider. If you are planning to invest in mutual funds through a lump sum, make sure you have a plan to stay invested for the long term. Investors with an investment horizon of 5-7 years and a conservative risk profile can invest in debt or large-cap funds. Moderate risk profile carrying investors can invest in flex cap funds. If you have short-term needs, you can opt for standard investment methods.
Taxation on gains from mutual funds through lump sum
Lump-sum investment gains from equity and debt mutual funds are subject to taxation. The tax rate depends on the duration investors wish to stay invested and gain from the funds. Based on their investment duration, an investor may generate Short-term capital gains (STCG) and Long-term capital gains (LTCG) and be taxed accordingly.
In the case of debt funds, capital gains from units that have been held for three years or less are considered Short term capital gains (STCG) and get taxed as per the investor's slab rate. The tax rate can be as high as 30% in this case. Gains from mutual funds units that have been held for three years or more are considered long-term capital gains (LTCG) and taxed at 20% with indexation benefit.
In the case of equity funds, capital gains from units that have been held for less than one year are termed STCG and get taxed at 15%. If the holding period is more than a year, the gains generated from units are called LTCG. The long-term capital gains of over Rs 1 lakh are taxed at 10%, whereas below 1 lakh are tax-free. Suppose your equity gains are 1.2 lakh in a financial year, so the 10% tax is applied only on Rs 20,000 while the remaining 1 lakh will be tax-free.
Note: If you plan to make a lump sum investment during the beginning of the financial year, you may receive significant tax benefits of up to 1.5 lakh from your taxable income under Section 80C. You can also lodge it on your income tax return.
Risks involved in lump sum investment
Lump-sum investments can be a pretty risky deal for you if you don't plan them well. One of the risks associated with lump sum investments is the price-to-earnings ratio. It's a metric to gauge the market as expensive, inexpensive, or fairly valued, and that can make or break your investment. As an investor, you should utilize it well to ensure a better return on the investment.
If the price-to-earnings ratio is high, it means that markets are expensive. If the price-to-earnings ratio is low, it means the market is cheap. In this scenario, it's a good opportunity to buy. To generate better returns from your lump sum investment, you should buy units at low and sell them at high.
Return potential of a lump-sum investment
Lump-sum investments have a remarkable potential to deliver you superior returns, provided you have the expertise and knowledge to time the market situations. The benefits of lump-sum investment are more apparent during bear markets when the market is low but have growth potential. If you invest in such market conditions and choose to sell when the market conditions improve, you will earn higher returns through the lump sum than SIP. If you invest large amounts in bull market trends, you end up with a loss.
In the case of equity funds, market timing is essential as they are friendly highly on stock market performance. You may choose to invest in these funds if you have an investment horizon of 5 years or more. Equity funds offer higher returns. However, they are highly volatile, and for shorter horizons, they can incur more losses than profits. So the longer you stay invested, the better returns you can attract. Else, you can invest in safer funds such as debt. These funds offer stable returns and are less affected by market conditions.
The compounding effect of lump-sum investment with time
Compounding is a process where existing returns from investments help investors generate more returns. As a result, the investors gain extra returns than intended. With lump-sum investment, investors can enjoy the benefits of compounding, if you plan to invest in mutual funds for the long term, preferably five years or more.
Suppose you have invested a large amount in equity funds. Since it's a volatile market, it's bound to fluctuate and incur losses. But, in the long haul, these losses get balanced and returns increase. So the longer you stay invested in mutual funds, the more you generate returns, and the better the benefit of compounding.
Advantages of a lump-sum investment
Some of the significant advantages of investing in mutual funds through a lump sum payment route are as follows.
Why should you invest in mutual funds through lump sum?
Lump-sum investment is one of the convenient ways to generate potential wealth through mutual funds. It allows investors to invest large amounts and fetch better returns. With lump-sum, you know the best time to enter the investment market. Lump-sum investment benefits are more apparent in low market trends and when the market gains positive momentum, you get to reap better returns.
If you have just received windfall gains or a large sum of money, you must choose the lump sum investment route. Before investing, connect with your investment planner or advisor to get your risk profiling done through an investment planner or advisor. It is essential to determine the range of your risk-bearing ability to make a well-informed decision, as lump sum investments come with high risks.
Lump-sum investment can help you create substantial wealth, provided you have the expertise, experience, and time to manage it according to market conditions. If you're interested in lump sums, make sure to invest in multiples so get an experience of different market levels and also you counter the risk associated.
Have any queries related to lump sum investment? We got you covered through this FAQ section.
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