What is a Lump Sum Investment in a Mutual Fund?

You may be familiar with the SIP route of investing in mutual funds. An acronym for a Systematic Investment Plan, a SIP is ideal if you have small sums of money available for investment purposes regularly. However, that’s not the only way in which you can purchase mutual fund units. It’s also possible to make a lump sum investment in mutual funds.

In this article, we’ll take a closer look at the meaning of lump sum in mutual fund investments, how this strategy works and why it could be beneficial to you. Let’s begin with the basics.

What is a Lump Sum?

A lump sum refers to a substantial sum of money that is transferred in one installment. It is also known as a bulk payment or a one-time fund transfer. Whatever the term used may be, the defining trait of a lump sum amount is that it is significantly high. For instance, a sum of Rs. 1 lakh is often referred to as a lump sum amount in the context of payments or investments.

The Meaning of Lump Sum Payments and Lump Sum Investments

To understand what a lump sum investment is in mutual funds, we need to differentiate between lump sum payments and lump sum investments. A lump sum payment is a one-time payment made in bulk for a purchase or bill payment. For instance, if you are purchasing life insurance and choose the single premium option, you make a lump sum payment at the time of buying the policy itself.

A lump sum investment, on the other hand, is a large amount of money that is invested in an asset or a scheme. In the context of mutual funds, it means using a substantial sum of money to buy units of a mutual fund scheme. This is the crux of the meaning of lump sum in mutual fund investments.

For example, say you receive a Diwali bonus of Rs. 1 lakh at work. You can use this lump sum to invest in an equity mutual fund today, so you can create wealth over the long term. If the NAV of your preferred scheme is Rs. 5 per unit, you can use the lump sum of Rs. 1 lakh to invest in 20,000 units.

How is a Lump Sum Investment Different from SIPs?

A lump sum investment in mutual funds is very different from regular investments made via SIPs. In a lump sum investment, you make a one-time purchase of the mutual fund units. However, if you opt for an SIP, you regularly purchase units in a mutual fund scheme at the prevailing NAV.

Let’s examine the differences between these two investment strategies more closely.

• Mode Of Investment A lump sum investment involves investing a significant amount of money at once in a mutual fund. It’s like a big one-time purchase where you buy a large number of fund units based on the current NAV. On the other hand, a Systematic Investment Plan (SIP) spreads the investment over time. You invest smaller fixed amounts at regular intervals (monthly, quarterly, etc.) by buying units at different NAVs over a period.
• Suitability Lump sum investments are typically ideal for investors who have a substantial amount of money available upfront and are comfortable with the risk of market timing. It’s ideal for you if you can analyse market conditions and are confident about investing a large amount at a particular point in time. Conversely, SIPs are more suitable for investors with regular income, who wish to invest small amounts regularly.
• Investment Horizon Lump sum investments in mutual funds may be suitable if you have a specific time frame in mind, whether short, medium, or long-term. They help you capitalise on the current market conditions, but the amount is locked in for a specific period if you choose a close-ended fund. SIPs, on the other hand, involve regular investments over an extended period, aligning well with ongoing financial capabilities and goals.