Everything You Need to Know About Lump Sum Investments

Lump Sum Investment

Lump Sum Investment

In general, the term “lump sum” means a single and huge sum of money. The lump sum investment means a big chunk of money at a single go.  For instance, if any investor wants to invest the entire amount available with him, is called a lump sum investment. Lump sum investment is said to be one of the best ways of investing into mutual funds.

Mutual Funds’ investors often fall into the dilemma of whether to invest their money as a lump sum amount or in Systematic Investment Plans (SIP). As per statistics, Lump Sum investments made by a depositor fetch higher returns than Systematic investment or a recurring account. As per statistics, it is demonstrated that CDR  [cumulative deposit receipts] outshines recurring deposit.

On one hand, SIP offers the benefit of averaging the units’ cost other than providing the compounding benefits and on the other hand, lump-sum payments.  Also, this type of investment requires an investor with greater financial capability. The tax liabilities and benefits are the same in both cases.

An investor is allowed to invest a fixed amount of money at regular intervals in a SIP. It also offers the benefit of averaging the units’ cost besides the compounding benefits. However, there may be situations when one would prefer to invest a lump sum.

This is due to the monthly renewal of liquidity [salary for example]. The choice of exit and transferring mutual fund portfolio is another scenario where SIP may be a smarter choice for being leaner in character and therefore easier to liquidate than a heavier portfolio fattened by a lump sum investment.

In a given case, where the rate of return is same, a person making a deposit of Rs 12,000 for a portfolio maturing at 12 months wherein monthly recurring of Rs 1,000 per calendar month would mean the same quantum of principal capital, but the yield would be more for the lump sum option as per mathematical calculations.

A lump-sum payment is a single payment in contrast to installments made in SIPs. Common examples are gratuity and PF and other retirement instruments, wherein the retired individuals accept a small upfront lump-sum payment rather than a big amount paid over the time.

The lump-sum amount can also be used as a bulk payment option to gain a group of items, such as a company paying one sum for the inventory of another business.

There are certain pros and cons associated with lump-sum payments when compared to a recurring annuity. Whether the investor has made the right choice or not entirely depends upon the lump sum value versus the payments and one’s financial goals.

Though annuities provide a sense of financial security up to an extent, a retiree in poor health may derive better benefits by opting for a lump sum payment. In case, the investors have this doubt that they won’t be able to live for much longer time period to receive the entire benefit, they can pass on the upfront payment to their heirs.

Also, an upfront lump-sum payment can be used to buy expensive capital goods like a car or house, that are otherwise not affordable with annuities. Similarly, it can be invested to earn a higher rate of return than the effective rate of return associated with the annual payments.

Given the highest priority to the lump sum investment, there are various methods and instruments present in the market to give light on this path of investment. Let’s have a look into different ways the investors can make lump sum investment.

Lump Sum Investment Types

  • Short term: These investments refer to the investments that are made for more than 1 year but less than 3 years. The investors can also invest a lump sum amount in Ultra short term fund. They can choose the ‘best fund’ under this plan to gain lump sum benefit for the future. For instance, if an investor plans to invest Rs 30 lakhs at the same time, they can divide the amount and invest in separate plans.
  • Midterm (3 -4 years): These investments are made for a period of more than 3 years. However, it’s recommended to avoid investing in equity for this particular option. Instead of that, investors can invest in funds of corporate bonds. The tax liability can lower the return rate by 5% due to the indexation.
  • Long term (5 years): If you plan to invest for the long term, investing in equity funds is always a better choice. There is zero tax liability on gains of the long term capital. Simultaneously, these investments also have low-risk associated with these plans. So, long-term plan would bring more benefit to the investor.

Conclusion:

Besides keeping the aforementioned points in mind, the investors should understand very basic fact that when it comes to returns, the higher their investment amount is, the better they will receive the returns. The more time they give to their investment, the higher the amount they will get (thanks to the compounding effect).

About Sashi 88 Articles
Sashi Singh is content contributor and editor at IP. She has an amazing experience in content marketing from last many years. Read her contribution and leave comment.

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