Top Mutual Funds for Lump Sum Investments

When Meera retired after 30 years of service, she received a sizeable gratuity corpus. It was comforting but overwhelming at the same time. She wanted to invest this money so that it could grow strategically to support her during the twilight years of her life. But she did not know where to invest. Parking it all in a savings account did not make sense, and traditional investment avenues often struggle to keep pace with the rising inflation.

That’s when a financial advisor suggested that she explore mutual funds for lump sum investments. This route allowed her to make a one-time investment in market-linked instruments without investing directly in risky equities. A fund manager manages the investments, aiming for strategic long-term growth.

The idea sounded promising to Meera. But she needed to understand the basics so that she could choose the right fund to invest in. And that’s what most investors need to do. This blog explains in detail the concept of lump sum investment in mutual funds and the key factors you must consider when choosing a mutual fund for a lump sum investment. Keep reading.

What Is A Lump Sum Investment In Mutual Funds?

A lump sum investment in mutual funds is when you invest a large amount of money in mutual funds in one go, instead of spreading it out over periodic instalments as you do in a Systematic Investment Plan (SIP). It refers to a single, one-time investment without any subsequent or periodic payments. You typically make a lump sum investment when you have a significant chunk of money available to invest immediately. It can be the bonus you’ve recently received, FD proceeds, or accumulated savings.

For example, suppose you are investing ₹1.5 lakh in a mutual fund scheme in one go. This will be counted as a lump sum investment. If you are investing the same amount in instalments, such as ₹10,000 every month for 15 months, it will be counted as an SIP investment.

When you make a lump sum investment, the entire amount is invested at the prevailing Net Asset Value (NAV) applicable on the day the transaction is processed. Your returns then depend on how the market performs after the investment date. Hence, market timing can play a more important role in lump sum investing compared to SIPs.

Factors To Consider Before Choosing Lump Sum Mutual Funds

Unlike in SIP, a lump sum investment exposes your entire capital to market movements at once. Choosing the right mutual fund, thus, becomes very crucial. Below are the factors you must consider when making this choice:

• Investment Horizon

It is important to choose a mutual fund scheme based on your investment horizon, i.e., the time period for which you are planning to invest. Equity mutual funds are generally suitable for long-term investors with an investment horizon of five years or more. Whereas, debt or hybrid funds may be more suitable for shorter to medium-term investment horizons.

• Risk Profile

Considering your risk profile is also crucial when choosing a mutual fund. Understand how much volatility you can tolerate. Aggressive investors may prefer equity funds, while conservative investors can consider debt or balanced funds that generally offer lower volatility and more predictable returns.

• Market Conditions

As mentioned earlier, timing is very crucial when investing lump sum amounts in mutual funds. Investing during market dips or relatively stable phases can work to your advantage, while entering at market peaks can expose your capital to short-term downside risk.

• Fund Performance History

Evaluate the fund’s long-term performance across different market cycles. Focus on funds that have delivered consistent, risk-adjusted returns over at least five to seven years, rather than short-term outperformance.

• Fund Manager’s Expertise

The fund manager will handle the responsibility of managing your investments. It’s better to invest in a mutual fund scheme which has an experienced fund manager with a strong track record.

• Expense Ratio and AUM Stability

A lower expense ratio can improve long-term returns, as it reduces the cost of managing the fund, though it should not be the sole selection criterion. Similarly, a stable and reasonably sized AUM (Assets Under Management) reflects investor confidence and can help ensure efficient fund management and liquidity over time.

Top Mutual Funds for Lump Sum Investment

Not all types of mutual funds are equally suited for lump sum investing. Some categories handle volatility better and offer more predictable long-term growth. Here are the fund types that typically work well for lump sum investments:

Large Cap Funds

Large-cap mutual funds are equity mutual funds that typically invest in the stocks of well-established and financially stable companies with proven track records. These funds generally exhibit lower volatility than small-cap funds and offer steady long-term growth. Hence, they are often considered a relatively safer option for lump sum investors compared to mid- and small-cap funds.

Multi/Flexi Cap Funds

Multi-cap or Flexi-cap funds invest across large, mid, and small-cap stocks. They allow fund managers to adjust allocations across market capitalisations based on market conditions. This adaptability makes them suitable for lump-sum investments, especially when markets are uncertain or range-bound.

Index Funds

Index funds are mutual funds that passively track a market index, such as the Nifty 50 or Sensex. These funds hold the same securities in the same proportion, aiming to match the index’s performance. They remove fund manager bias and offer benchmark-linked returns. Their simplicity and relatively lower cost structure make them suitable for long-term lump sum investors.

ELSS Funds

ELSS stands for Equity-Linked Savings Scheme. ELSS mutual funds primarily invest in equities and offer tax benefits under Section 80C of the Income Tax Act of 1961. However, they come with a mandatory three-year lock-in period. ELSS funds are useful for investors seeking both wealth creation and tax efficiency over a long-term investment horizon.

When Should You Make A Lump Sum Investment?

Here are the ideal scenarios when you should make a lump sum investment in a mutual fund scheme:

• During Market Corrections or Dips

Stock markets go through corrections or dips from time to time. They also sometimes decline due to economic uncertainties or global geopolitical events. Making a lump sum investment during such a time allows you to buy more mutual fund units at a lower NAV.

• When You Receive Sudden Cash

At times, you may receive a sudden chunk of capital. For example, bonuses, inheritances, fixed deposit maturities, customer payments, or proceeds from the sale of a property. Rather than letting this money sit idle in your savings account, you can park it in a mutual fund scheme through a lump sum investment.

• When Investing for a Long-Term Goal

A lump sum investment in a mutual fund can be a good option if you are investing for a long-term financial goal. For example, creating a corpus for your child’s education or marriage, or investing for your retirement.

• For Year-End Tax Savings

If you are investing at the end of the financial year to reduce your taxable income, making a lump sum investment into an ELSS fund can be a good idea. These funds offer better returns than most 80C instruments, including PPF, NSC, tax-saving fixed deposits, etc.

Benefits And Risks Of Lump Sum Investing

Lump sum investing can accelerate wealth creation. At the same time, it exposes your entire capital to market risks at once. Understanding both sides can help you make an informed decision, even if you’re investing in the top fund for lump sum investment. Here are the major benefits and risks:

Benefits of Lump Sum Investing

• Lump sum investing is simple and convenient. Unlike an SIP, you invest just once and watch your capital grow.
• When you invest a lump sum, the entire capital starts compounding from day one. This results in significant capital growth in the long term.
• A lump sum investment in a mutual fund can be an ideal route when you are investing for a long-term financial goal.
• You have full control over how and when to invest. If you can read the market, lump sum investing is a better option than an SIP.
• Lump sum investing is perfect for deploying sudden windfalls through bonuses, inheritances, or the sale of assets.

Risks of Lump Sum Investing

• Timing matters a lot in lump sum investing. Investing at a market peak can lead to short-term losses and delayed recovery.
• Sudden market swings can affect your full capital significantly. This is not the case with SIPs, where the cost of investments averages out over time.
• The entire investment amount is exposed to market risks from day one. A sudden downturn can have a significant impact on your portfolio.
• Lump sum investing in equity funds is not suited for short-term goals. The market is unpredictable.

Lump Sum vs SIP: Which Is Better?

There cannot be a universal answer to this question. Which among lump sum or SIP is better depends on a combination of factors, including the investor’s market knowledge, investment objective, financial goals, risk appetite, and the prevailing market conditions. Analysing these parameters can help you make the right decision.

Market knowledge: Timing the market is very crucial in the case of lump sum investing. Thus, you should choose this method only if you have adequate knowledge to read the market. SIP, on the other hand, eliminates the need to time the market.

Investment Objectives: If you are investing to create a corpus brick by brick, SIP is the most suited investment method for you. However, if you are investing to park a large amount, a lump sum investment is your go-to option.

Investment Approach: Lump sum investing is suitable for those who have a sizeable corpus to invest. Whereas SIPs work well for investors with limited monthly surplus, beginners who want to avoid volatility, or anyone focusing on disciplined long-term investing.

Market Conditions: Considering the prevailing market conditions is essential when making a lump sum investment. Buying on dips can be a good strategy. In the case of SIPs, market conditions have a limited role to play.

Key Takeaways For Investors

Here are key takeaways for investors willing to make lump sum investments in mutual funds:

• Timing the market is crucial. Invest only if you have adequate market knowledge.
• Your investments will get exposed to market volatility from day one. Be prepared.
• Choose your mutual fund scheme wisely. Large-cap, multi-cap, and index funds are generally safer options.
• Invest through an SIP if you want to eliminate the market timing risk.
• Review fund performance, expense ratio, and the fund manager’s expertise before investing.
• Be patient and remain invested for long-term wealth creation.
• Lump sum investing is usually not suitable for short-term financial goals.

To Conclude

Lump-sum investing can be a smart and efficient way to grow wealth, especially when you have a sizeable one-time amount to invest. However, it’s crucial to consider the risks involved and invest only if you have adequate market knowledge and a long-term investment horizon. You can choose the top mutual fund to invest in a lump sum based on your financial goals, risk appetite, market conditions, and the fund manager’s expertise.

Sources:

Kotak Neo
Kotak Neo