Investing in mutual funds is not only rewarding but also inculcates discipline. These days, everyone that you see around is investing in mutual funds and the reason behind this is the kind of returns these market linked schemes have been offering over the years. If you compare historical data, mutual funds have outperformed every other type of conventional investment instrument. People are slowly starting to realize that there is no point in locking their money in a fixed deposit or a Public Provident Fund because all you are getting really low returns. Also, there is no liquidity. If you have to withdraw a portion of your gains, you have to pay a penalty.
Mutual funds on the other hand do not have any lock-in period. There are literally thousands of mutual fund schemes to choose from. Investors should build a portfolio of schemes that give them exposure to different asset classes.
When it comes to equity mutual funds, most investors prefer the SIP mode. However, it is also possible to make a one-time lump-sum investment. While most investors choose the SIP route as it allows them to save and invest a fixed sum of their monthly income, wealth creation is possible through lump-sum investing as well.
If an old policy of yours has recently matured or if you have inherited some decent capital that you want to use to create compounding wealth, you can consider making a lump-sum investment in equity mutual funds.
Here are a few pointers to bear in mind when making lump-sum investments in market linked schemes like equity mutual funds.
Keep a long term investment time horizon
The money that you have invested in equity mutual funds through a lump-sum investment can only grow if you give it its own sweet time to grow. Do not be impatient if you witness a negative slope in your investment portfolio. The equity markets are always volatile in the short run. That’s because they constantly fluctuate and this, in turn, affects the performance of equity funds. The markets may seem volatile for time being, but they always correct themselves and bounce back. Hence, when making a lump-sum investment, keep a long term investment horizon and give your money some time to grow.
Keep an eye on market movements
The smart step to take when making a lump-sum investment is to keep a close eye on the market and enter at the right time. A lump-sum investing strategy will mostly work if you enter the markets when they are at rock bottom but show signs of potential growth. When you invest in a mutual fund scheme during a market downturn, you will be able to buy more units as the NAV (Net Asset Value) of the schemes will be low. This will average out the cost of purchase as you can buy units at a low price. When the markets normalize, the NAV of the scheme is bound to go up, thus helping you earn profits.
While equity mutual funds are an ideal investment tool for long term wealth creation, investors should not invest all their money in one asset class. A mutual fund portfolio should have the right mix of equity and debt. This way, when there is an economic slowdown, investments in debt funds can offer the necessary cushion and help generate low but stable returns. It is less likely for all the asset classes to perform in tandem at once. Hence, one must make sure that if 80% of their portfolio of exposed to equity, a minimum of 20% of the assets can be allotted to debt mutual funds.