Lumpsum Investment - Meaning, Benefits And How It Works
Awadhesh has recently received a financial windfall1 (a sum of INR 500,000/-) on the maturity of a corporate bond invested by his father a few years ago. As an IT professional, he has little knowledge of how the stock market works, what are the asset classes, and which are the popular modes of investments.
However, he does know a bit about SIP (Systematic Investment Plans) and mutual funds.
As he turns 26 next month, he needs to put money to the best use. He searched for different investment alternatives and the best mutual fund for lumpsum investment, but required more clarification.
If you are in a similar situation like Awadhesh or know someone facing a similar challenge, this blog will help you understand the advantages and limitations of a lumpsum investment strategy and help you make a choice that suits your financial goals.
What Is Lumpsum Investment In Mutual Funds?
From the perspective of mutual funds, a lumpsum investment can be explained as a commitment to invest a significant amount of money in a given fund rather than in smaller, periodic, and systematic investments. This investment mode is the opposite of SIPs, where an investor allocates smaller amounts regularly (daily, weekly, or monthly).
It is worth noting that despite the popularity of systematic investments (making up around 19% of the total AUM2 (Assets Under Management) of Mutual Funds), a more significant portion (remaining 81%) is still attributed to the lumpsum investments.
Figure 1.0: Graph depicting value of Lump Sum Investment of INR 5 Lakh invested 20 years ago in the best-performing Mutual Funds – In INR Crore (Source: The Economic Times3)
This investment strategy is also often preferred by HNIs (High Net worth Investors) and anyone with a large amount of money at their disposal. One of the key benefits here is that the total amount of gain can be quite significant, especially when the market remains favourable through a majority of the investment tenure.
How Does Lumpsum Investment Work?
Just like in the case of Awadhesh, suppose you have recently received a large amount of money (in the form of inheritance, bonus, or maturity of an investment/savings). You have a large amount at your disposal which you wish to put in mutual funds.
Depending on your risk tolerance, you have multiple lumpsum investment options to pour the entire amount into different mutual funds (such as equity, debt or hybrid).
Awadhesh can opt for a lumpsum investment after analysing the market conditions. He should also have a long-term view (at least 5–10 years). Alternatively, breaking down the amount and starting an SIP can also provide decent returns.
Once the investment is made, the investor is allocated units of the chosen mutual fund. Just like in the case of any other class of investment asset, timing (of entry and exit) is quite critical here (even though it is impossible to predict the best time).
In the case of equity and hybrid funds, the lumpsum investment’s growth is determined by the underlying assets and overall market conditions. However, debt funds depend on interest rates and bond prices.
What Are The Features Of A Lumpsum Investment Plan?
Here is a table describing the most critical features of a lumpsum investment:
Feature | Description |
One-Time Large Investment | Lumpsum investments include pouring a large amount of money into a mutual fund, compared to smaller investments in SIPs. |
Ideal for Surplus Funds | This can be the perfect investment mode if you have accumulated funds or a windfall. |
Long-Term Growth Potential | Especially in the case of equity funds, the potential is quite high due to the immediate compounding of a substantial amount. |
Higher Exposure to Volatility | Since the investment is lumpsum, it is exposed and sensitive to market volatility, typically in the short term. |
Risk and Reward Potential | The risk is higher (due to market timing), but the potential for reward is also higher, especially if the market conditions are favourable. |
Table 1.0: Salient Features of Lumpsum Investment
Top Performing Lumpsum Investment Mutual Funds
The categories of mutual funds are based on the underlying assets wherein the investments are made. These are the most popular categories of top-performing mutual funds:
Equity Funds: These funds put money in the stock market through equity investments aiming for high growth.
- Example: HDFC Top 100 Fund (20.1% CAGR), ICICI Prudential Bluechip Fund (15.8% CAGR)
Debt Funds: These funds rely on fixed-income securities such as corporate bonds, thereby offering stable returns to the investors.
- Example: Aditya Birla Sun Life Medium Term (8.91% CAGR), SBI Magnum Gilt Fund (7.6% CAGR)
Hybrid Funds: These funds combine equity and debt investments to stabilise risk and returns.
- Example: ICICI Prudential Equity & Debt Fund (24.76% CAGR), Quant Multi Asset Fund (31.67% CAGR)
Tax Saver (ELSS) Funds: This mutual fund category provides benefits under Section 80C of the Income Tax Act, 1961.
- Example: SBI Magnum Tax Gain Fund (27.5% CAGR), HDFC Tax Saver Fund (23.4% CAGR)
It is critical for Awadhesh to know that the historical performance is indicative, and not a guarantee of future returns. However, it is crucial to know how different asset classes have performed, typically in the long-term.
Considering the past decade’s performance as the standard, here is a table depicting the best mutual funds for lumpsum investment:
Category | Fund Name | 10 Year CAGR | Best Suitable For |
Equity | ICICI Prudential Bluechip Fund | 15.8% | Large-cap exposure, long-term growth |
HDFC Top 100 Fund | 20.1% | Large-cap, high-growth potential | |
Debt | SBI Magnum Gilt Fund | 7.6% | Low-risk, government bond exposure |
Aditya Birla Sun Life Medium Term | 8.91% | Stable returns, medium-term horizon | |
Hybrid | ICICI Prudential Equity & Debt Fund | 24.76% | Balanced equity-debt exposure |
Tax Saving | SBI Magnum Tax Gain Fund | 27.5% | ELSS, tax-saving benefits |
HDFC Tax Saver Fund | 23.4% | Long-term capital appreciation, tax benefit |
Table 2.0: Mutual Funds with Highest CAGR in 10-Year Period (Source: MoneyControl4)
Benefits And Limitations Of Lumpsum Investment
Here are the most critical benefits and limitations of lumpsum investments:
Benefits | Limitations |
The immediate exposure to market upside can result in potentially higher returns. | At the same time, being fully invested at once can result in greater vulnerability to short-term market fluctuations. |
It is an idea if an investor has a large corpus ready to invest. | There can be significant losses if the money is invested at the wrong time. |
Tracking and monitoring fund performance is easier and straightforward. | Large investments can be stressful during a bearish or volatile market scenario. |
The transaction costs and brokerage are lower. | Investors miss out on the benefits of spreading the risk over time, like SIPs. |
An investor can put a lot of money during a crash or market low. | There can be liquidity concerns as much money is parked in a single investment. |
Table 3.0: Pros and Cons of Lumpsum Investments in Mutual Funds
How Does Lumpsum Investment Differ From SIP?
Compared to a SIP, lumpsum investment is different from the following three perspectives:
1. The Investment Approach: In the case of the lumpsum option, the approach is a bit aggressive as the investor wants to make the best use of the existing market conditions. However, a SIP investor is looking for averaging investments (and returns) and hence has a more balanced investment approach.
2. Risk and Return Profile: The level of risk of a lumpsum investment is on a higher side as compared to SIP mode. At the same time, the returns are also on the higher side for a lumpsum investment if the market conditions remain favourable.
So, in case Awadesh had made a lumpsum investment of the entire corpus (INR 5 Lakhs) in the funds mentioned in Table 2.0 (investment supposedly made in the year 2020), the expected value at the end of 2024 shall be as follows:
Fund | CAGR (10-Year Avg.) | Value of Lumpsum Investment (2024 end) |
ICICI Prudential Bluechip Fund | 15.8% | INR 8,99,092 |
HDFC Top 100 Fund | 20.1% | INR 10,402,60 |
SBI Magnum Gilt Fund | 7.6% | INR 6,70,222 |
Aditya Birla Sun Life Medium Term | 8.91% | INR 7,03,462 |
ICICI Prudential Equity & Debt Fund | 24.76% | INR 12,11,355 |
SBI Magnum Tax Gain Fund | 27.5% | INR 13,21,328 |
HDFC Tax Saver Fund | 23.4% | INR 11,59,392 |
Table 4.0: Anticipated 4-year return for an investor putting INR Lakhs in top performing Mutual Funds in 2020
Which Gives Better Returns: Lumpsum Or SIP?
There is no universally correct answer to this. The returns on investment depend on market conditions at entry and exit. If a lumpsum investment is made when the market is in slumps followed by a bull run, the returns will outperform SIPs.
However, the SIPs shall provide a slightly better return in volatile and bearish markets as they tend to average the investment cost.
Coming back to our original example, it is highly recommended that Awadesh looks to diversify his portfolio. This will help manage overall risk and increase the total return on the investment. Alternative Investments such as SDIs (Securitised Debt Instruments) can be an excellent choice for an investor.
Factors To Consider Before Investing In Lumpsum Investment: A Cheat Sheet For Investors
Here is a checklist cum cheat sheet for investors looking for the best mutual fund for lumpsum investment:
1. Analyse the market conditions and avoid putting money during market peaks.
2. Always have a long-term time horizon (5-10 years)
3. You must have a high-risk tolerance.
4. Align your investment with financial goals.
5. You must ensure that this investment will not impact your liquidity position.
Summing Up
Awadesh’s case is not unique as there are many investors who, after receiving a financial windfall, are confused between a SIP and a lumpsum investment in a mutual fund. If you are someone who does not have the time or patience to monitor the market constantly, this type of investment can be an excellent option. A lump sum investment’s return and risk are slightly different from SIPs.
However, evaluating the market conditions and your financial goals before making this decision is critical. For instance, a lumpsum mutual funds investment can provide lower returns (or even negative returns) if the time of entry is incorrect.
If you wish to avoid the market risks and get the best of the upside, we advise a lumpsum investment in corporate bonds and securitised debt instruments (SDIs) to strengthen your portfolio. Join Grip to learn more about lumpsum investment and SIPs in corporate bonds, fixed-income securities, and other assets.
Frequently Asked Questions On Lumpsum Investing
1. What is the best way to invest a lump sum of money?
The best way would be to evaluate your risk preferences and financial goals. It is also important to diversify across asset classes such as equity, debt, and alternative investments.
2. Is lump sum investing risky?
Yes, lump sum investing can be risky due to immediate exposure to market volatility, but it also offers the potential for higher returns if the market performs well over time.
References
1. Investopedia, Accessed from: https://www.investopedia.com/terms/w/windfall-profits.asp
2. Fortune India, Accessed from: https://www.fortuneindia.com/investing/mutual-fund-aum-surges-to-589-lakh-cr-in-may-inflows-in-equity-mf-hit-all-time-high/117120
3. The Economic Times, Accessed from: https://economictimes.indiatimes.com/mf/analysis/crorepati-dream-12-mutual-funds-deliver-over-100x-return-in-2-3-decades/articleshow/108031049.cms?from=mdr
4. Moneycontrol, Accessed from: https://www.moneycontrol.com/mutual-funds/find-fund/
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