Market crashes cause panic selling, but smart investors see them as opportunities for lumpsum investments. Capitalizing on downturns can lead to significant long-term wealth growth.
What is a Lumpsum Investment?
- Lumpsum investing is where you invest all the money in one go.
- Under the SIP mode of investment, you decide on an amount that will get invested every month.
SIP vs Lumpsum
- SIP (Systematic Investment Plan): Involves investing a fixed amount regularly (monthly or quarterly) in mutual funds, averaging the cost of investment over time, reducing the impact of market volatility, and promoting disciplined saving.
- Lumpsum Investment: A one-time, large investment made at a single point in time, offering the potential for higher returns in a favorable market but also higher risks, as the timing of the investment can significantly impact returns.
How Does a Lumpsum Investment Work?
- In a lumpsum investment, the entire amount is invested at the current market price of an asset. Returns depend on how the asset performs over time.
- For example, if you invest in a mutual fund, the fund manager distributes your money across stocks or bonds, and your investment value changes with the market.
- As an example, if you invest ₹1,00,000 as a lump sum in a mutual fund that gives an annual return of 12%. Your investment will grow to ₹1,76,234 in five years.
Smart Strategies for Lumpsum Investing
- Lumpsum investments carry high risk, so invest wisely.
- Invest during sharp market corrections only if you have a long-term perspective.
- As per the standard definition, a fall of 10% or more is considered as a correction
- Avoid investing the entire amount at once; instead, divide your investment.
- Every time the market dips, invest in small chunks to reduce risk and maximize returns.
Benefits of Lumpsum Investment
- Potential for Higher Returns: In a bullish market, it will give higher returns over a long period of time.
- Leverage Market Timing: If you expect market growth, lumpsum investing helps you buy units at lower prices(NAV). This maximizes potential gains when the market rebounds.
- Cost-Effective: It has lower administrative fees compared to SIPs.
- Compound Growth: Lumpsum investing benefits from compounding, as returns grow exponentially over time. The earlier you invest, the longer your money has to multiply.
Conclusion
- If you have the money and want to invest for the long term, start lumpsum investments.
- Your money is better off in equities than in your bank account.
- A market correction is the best time for lumpsum investment.
