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Lump-Sum Meaning 2022 Guide – What are Lump Sum Investments & Payments

Want to know the meaning of lump sum and how it is different from SIP? Find out all about lump sum investing.

Investors today have a lot of choices of investing and for their payment too. Systematic Investment Plan (SIP) and lump sum investments are among them. Depending on your income, expenditures, risk profile, and financial goals, you can choose to invest in Mutual funds through any of these methods. Both have their fair share of benefits. But, the lump-sum payment method is preferred highly by the majority of the investors, the reason we shall find out in this section.

 What are Lump sum payments and lump sum investments in mutual funds?

Lump-sum means an amount of money, whether it's small or large, paid in one go instead of breaking them into instalments. When you invest in a mutual fund through a lump sum, you pay the amount all at once in any fund scheme. The lump-sum investment method in mutual funds is preferred highly by prominent investors who can bear the high risk and rely solely on stocks appreciation for wealth generation. 

Lump-sum or SIP, which is more likely to generate better returns?

Well, the answer lies within the stock market conditions. During bullish trends, the lump-sum investment gives relatively higher returns than SIP. But, when the markets show bearish trends, the SIP draws better returns than the lump sum. 

Advantages of lump sum over SIP

  • With lump-sum investments, the investors are free of future investment commitments.
  • The lump-sum amount means investors can invest in large and reap greater returns as compared to SIPs.
  • Lump-sum investments provide better control over the market. Investors can choose to invest in the market at lower valuations and make the most out of the investment.
  • One may put their money anytime, at once, in the lump sum investment, which is not the case with SIP.
  • Investing in a lump sum, in particular, turns out beneficial when the market indicates a bullish trend. Investors make the most out of their investment through market rallies, as their amounts stay invested at all times.

How lump sum is different from SIP?

Both SIP and lump-sum investments help investors in building potential wealth through mutual funds. However, the primary difference between SIP and lumpsum is the investment frequency. In lump sum, the investors invest only once, whereas, in SIP, they invest weekly, monthly, or quarterly. Besides this, there are many differences that you must know to make an informed mutual fund investment decision.

  1. Lump-sum investment is preferred for a continuously growing market, while SIP for falling NAV.
  2. Lump-sum investments are prone to market volatility, whereas SIPs are comparatively less affected by market volatility.
  3. SIPs are for individuals having a constant source of income, else lump-sum investment is the right way.
  4. The investment cost in a lump sum is more as compared to SIP.

3 points to consider before going for a lump-sum payment for an investment

The lump-sum mutual fund investment requires a careful evaluation of the following factors. Resorting to these helps you make a better investment decision for yourself and reap the profits as intended. 

Decide on the investment amount

  • If you are going for a lump sum investment, the minimum amount required by most mutual funds is Rs. 5000. Once you make the first lump sum payment afterward, you can invest in multiples of Rs.1,000 in the same scheme.

Consider the time frame

  • With the lump-sum investment, you can hold the equity mutual funds for a longer time. Preferably it should be for three years or more. If you are looking for a short-term appreciation, a debt or liquid fund might be the right option.

Take a note of market volatility

  • When you invest in large amounts, your investments, you are likely to suffer during low markets trends. However, the key is to stay in the market for long. The benefits of the lump sum are more prevalent during down-market trends wherein you have the opportunity to invest in mutual funds at lower prices. You can also choose them to sell when the market improves, thereby making substantial profits.

Conclusion

Lump-sum investment can help you build substantial wealth and justify the meaning of lump sum in both ways (investment and return), provided you have the expertise, experience, and time to roll it over 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 while you counter the risk associated.

 FAQs

  1.  Which is the best fund to invest as a lump sum?
    • Debt funds are the best choice for lump-sum investment as they are not as volatile as equity investments.
  2. Why is lump sum investment better than SIP?
    • With lump-sum, you know when to enter the market and investments. Lump-sum investments are most beneficial in low market trends, and when the market shows growth, your investment reaps better returns than SIP.
  3. Can a lump sum amount be paid multiple times in the same or other mutual funds?
    • Yes, in both cases, lump-sum amounts are made multiple times.
  4. Can I switch from SIP to Lump sum within the same scheme?
    • Yes. You can invest in mutual funds the way you want. So, if you have a SIP with a mutual fund house for a particular scheme, you can add a lump sum amount to the same fund scheme.
  5. How to invest a lump sum of money in mutual funds?
    • If you plan to invest in a mutual fund as a lump sum, make sure you invest in multiple stocks to gain market exposure.

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