You might be hearing every now and then that doing SIP every month will help you generate a good corpus, but you should also know that it’s not the only way out to invest in mutual funds. You can also build a corpus by investing a lump sum amount or whenever you have surplus money. Many a times people are not able to invest their money on a regular basis, mostly in cases when people have their own business. In such cases, people do not earn a fixed monthly income. Their gains vary month on month and it becomes difficult for them to invest a specific amount into mutual funds on a monthly basis.
Investing Rs 10000 in lump sum for the next 30 years in a mutual fund scheme, where you are able to get average returns of 15% to 17%, can help you build a corpus of Rs 10 lakh approximately. However, if you have invested the same amount for 20 years, then you will be able to generate Rs 2.4 lakh only (keeping other factors constant). Generating Rs 7.6 lakh in the last 10 years, that is from 20th year to the 30th year, is possible because of the compounding effect. It is a process where your earnings on investment get multiplied over a time period. Hence you are able to accumulate more wealth when your investment is held for a longer time period.
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Rs 10000 may just be a small investment amount for you today and if the same amount is invested at the right time, then it can become more valuable at the time of your retirement when you can get approximately Rs 10 lakh. However, doing a lump sum investment is not an easy task. You should know a few important things before making a lump sum investment in mutual funds.
Time the market
When you are investing your money at one go, then it becomes important to time your investment and look for the most favorable time for getting maximum returns. Suppose you are investing in equity mutual funds whose NAV has reached a high level, then in such a case you may not consider investing your money with a lump sum amount. When the NAV is at the year’s lowest, then it is the best time for making an investment in mutual funds. Mostly, it is advisable to invest your lump sum amount in either a fixed deposit or liquid fund and wait until the situation is favourable for doing a lump sum investment.
Know all the tax implications
While investing a lump sum amount in the mutual fund, you should know that the amount should be invested for at least 1 year in case of equity and 3 years in case of debt funds. Otherwise you will have to pay heavy taxes which can erode your absolute gains at the time of redemption. If you have made the investment for a short term, gains from debt funds are taxed as per the applicable tax slab rate of an individual, whereas if gains are made from an equity fund, the tax rate applicable will be flat 15% irrespective of slabs. However, if the investments are held for more three years in a debt fund, the tax rate is 20% with indexation or 20 percent without indexation. But in case of equity, long-term capital gains are totally tax-free if investments are held for more than one year. ELSS schemes for tax saving have a lock -in period of 3 years. After that the total gains are tax-free.
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Link your investment with a financial goal
The compounding effect helps you in multiplying your investment amount, but it doesn’t mean that you should remain invested without any purpose. Always define a purpose for your investments which will help you to remain invested for a specific time horizon, which in turn helps you to generate a good amount of corpus over a period of time. You should also note that a lump sum investment also requires a proper asset allocation strategy so as to maintain the desired expected returns to meet your goal amount.
You should always take proper guidance of a financial adviser before making such kind of investments in mutual funds.