Mutual funds, just like any other investment option, work best when you invest according to your goals and risk appetite. A major factor that contributes to your investment goals is the amount you invest. There is a common notion, at least among beginners, even now that investing in mutual funds is not flexible at all. This could be one reason that stops many people from trying them out as a form of investment. But is there any truth in that? How much should you invest in a mutual fund in one go? Let us take a look.
What is a mutual fund?
Mutual funds are an easy way to invest in securities, including stocks. There are two options for a retail investor to invest in. Either they can invest directly by picking the securities themselves or rely on a mutual fund. When you choose a mutual fund, there will be a preset portfolio that is built according to the theme of the fund. This is built by professional fund managers and is meant to make your investment easy.
Now there are two ways to invest in a mutual fund as well, Either you can choose to invest a corpus amount in one or as monthly instalments. The former is called a lump sum investment the latter is done through a system called systematic investment plan. Let us learn more about them now.
Lump sum investments in mutual funds
Lump sum investment is when you invest a corpus that you already have in a mutual fund. Let us see what the features of this are.
- The first prerequisite to do so is a lump sum amount of money. Investing the same should not, in any way, constrain your day-day-day budget. You should not lend money to invest either, as it could defeat the purpose of investing.
- When you are putting a considerable amount of money into an investment vehicle at once, you should look to time your investment perfectly. If you invest at a time when the potential to grow is diminished, you may end up with a loss. Since the amount in question is higher, this dip may take much time to be recovered from.
- There are main goals to lump sum investments in mutual funds. You can invest to appreciate or protect your capital. The former is done by investing in aggressive mutual funds with more equity components. For protection, you may choose a debt fund. If you want both protection and appreciation elements, you may choose a hybrid option.
- Compounding is the biggest advantage of investing in a lump sum. In investment terms, compounding is when the interest generated by the fund is reinvested so that the compounded corpus will start earning interest.
Systematic investment plans
The second common way to invest in mutual funds is through monthly instalments. Let us learn about the features of the same.
- The main goal of starting a SIP is to create a corpus in the long term. SIP gives you the flexibility for that as well.
- You can start small with a SIP. You can start with investments as small as Rs.500 per month and still manage to make a considerable corpus in long term. Just make sure that you ramp up your investments occasionally as your income increases.
Both SIP and lump sum are common options to invest in a mutual funds. The choice among these should be based on your goals and the availability of funds. For instance, if you want to build a corpus, SIP may help you better while if you are looking to park your money safely lump sum investment may help better.
