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What is Lump-Sum Investment

A lump-sum investment refers to a situation whereby an individual or an organisation invests a large sum of money at one particular period of time in a financial asset.

What is Lump-sum investment in mutual funds?

In mutual funds, lump sum is defined as the purchase of a single block of mutual fund unit on one attempt. For example, if you plan to invest in a mutual fund then in case you invest NPR 100,000 then you get certain units by the NAV current prevailing in the market shown below. This strategy is often selected by those investors who have a large sum of money to invest, for instance, a bonus, inheritance or savings, and the investor who wishes to invest a lump sum instead of gradually through SIPs.

How does lumpsum investment work?

With a lump-sum investment plan, all your amount is invested straight away and is thus exposed to market risks from the start. Indeed, that means your investment may also increase at a higher rate if the market is doing well. But in a situation where the market drops shortly after the investment you may end up losing money. This strategy differs depending on when an investor enters a particular market because getting into a market during a down cycle can help to achieve maximum returns while getting into a market during an up cycle will subject you to short term fluctuations.

Things to consider before investing in Lumpsum investment

Before making a lump-sum investment, there are key factors to consider to ensure it aligns with your financial goals and risk tolerance:

Mode of Investment

There are mainly two approaches to investing in a mutual fund: through a systematic investment plan (SIP) or a lump sum. With SIP, the investment occurs in parts rather than all at once, as it involves making regular monthly contributions of a predetermined amount by the investor.

 

Conversely, a lump sum investment entails putting a substantial amount of money into the fund all at once, without considering any segmentation of the available funds or Potential Investors

A one-time investment is often more advantageous for larger investors. These individuals have spent more time in the industry and accumulated significant market experience. As a result, they are also capable of managing the risks associated with investing a substantial sum.

Time period of investment

In the situation of a lump sum payment, the total sum is secured for a specified duration. Because installments are not required, the payment or deposit is made just a single time, making it unchanging.

Market Ups & Downs

In the Capital market; stock prices and unit prices can go up and down, whereby, there are times that it rises which is referred to as the bulls market and there are times that it drops which is referred to as a bear market. As for the lump sum investment, the issue of market timing has a tight connection. Through this you get high returns because the price of stocks are relatively low when compared to when you buy stocks while in the market highs you may be forced to sell shares when the market has dipped, which leads to immediate loss making. Because market movements are unpredictable, the long-term orientation is most appropriate, at the same time, keeping in mind short-term fluctuations. Being an investor, one can also spread the risk through diversing through different assets or through investing in balanced funds.

 

Also read: Investment modes in Mutual Fund

Benefits of lumpsum Investment

Immediate Market Exposure:

Since in lump-sum investment your whole money is put in the market from the start, you are in a position to benefit from market upswings from the word go. If the overall market is healthy, you stand to gain a lot of profit in the long-run because all of it has the potential to rise.

Simplicity

Lumpsum investments offer greater convenience compared to SIPs since you make a single investment and observe its growth, while with SIPs, you have to ensure regular contributions. Additionally, investing through SIP can lead to a mental habit of frequently monitoring for profits. Conversely, with lumpsum investments, you can relax after making your initial investment.

Minimum Charges

Since lump sum investments are made in a single instance, they generally involve minimal charges compared to regular investments. They are associated with lower transaction fees.

 

Less Frequent Monitoring:

It is different from SIP who invests fixed amounts periodically and checks his investments periodically and lump sum investment is one time investment. It is convenient to deal with it because once you have invested this amount of money, it generates interest and you don’t have to bother with corrections and follow-ups.

Who should invest in Lumpsum Investment?

Lumpsum investment means putting a large amount of money into an investment scheme at once, instead of gradually investing smaller amounts over time. It can be a smart strategy for certain types of investors, especially in a growing economy like Nepal. Here’s who might consider it:

Incentive Earners

Lumpsum investment is suited to earners taking incentives such as sales people, businessmen, professionals who take bonuses commissions or one-shots big amount earners. They get their bonus in cash, which is usually left in a low-paying savings account where the money doesn’t even earn much interest; the whole bonus can be invested in risky Framed options such as mutual funds, stocks or real estate with a potential of earning more. 

Risk Takers

The high risk takers are individuals who are willing to take more proportions-risk takers in knowledge-of high risks for high returns sometimes they are young professionals, entrepreneurs and investors. They are at ease with the roller coaster of the markets and have the leeway to invest a huge amount of money when the markets are down, so they can make huge profits as the markets start to recover. For instance, in the situation where the stock market in Nepal, a country under consideration in this paper, begins to perform poorly, a risk taker may decide to buy stocks worth NPR 1m with a view of getting higher returns compared to that which would be got from safer securities in future.

Long-Term Thinkers

Holders of long term funds like those who are planning for retirement, education for children or any other long term planning do not require the funds they have invested for the least 5-10 years. They profit from lump sum investments because on the average in the long run, stock market or mutual funds tend to rise regardless of short term forces. The principle here is that they can make a significant amount of money grow even bigger by reinvesting it, and achieving exponential gains at that.

How to calculate returns on lumpsum investment

To calculate returns on a lump sum investment, start by determining your initial investment and the current value. For absolute return, use the formula:

Absolute Return=  

Current Value - Initial Investment

______________________________x 100

         Initial Investment

For example, if you invested NPR 500,000 and the current value is NPR 600,000, the return would be 20%. For long-term investments, calculate the Compound Annual.

Growth Rate (CAGR)= (Final Value/Initial Value)1/n−1

Where "n" is the number of years. Also, include any dividends in your calculations to get the total return. These methods help you assess the growth of your lumpsum investment effectively.

Where can I buy mutual fund units via lump sum?

You can buy mutual fund units via lumpsum investment in Nepal through Fund Managers who have been managing Mutual Funds (both closed ended as well as open ended) like Nic Asia Capital,. Another option is to purchase open end mutual fund units (lump sum investment or SIP) directly from Fund management companies either by visitng the office of NIC ASIA Capital or any branches of NIC ASIA Bank or purchase through online (https://mutualfund.nicasiacapital.com/) . We have been offering online platforms  i.e. our website, mobile wallets ( esewa, Khalti, IME Pay) making it easy to invest from home. You’ll need your Demat account number,  citizenship ID, bank details to complete the process.

How to choose the best mutual fund for lumpsum investments for investing?

First, to decide which mutual fund is the most suitable for the lump-sum investment decision, know whether you have a short-term financial target, such as buying a car or building a home, or long-term goal, such as retirement. The track record of the fund can be compared to the index data for the last three to five years and analyse your risk profile—high risk for high gain with equity or low risk with debt funds. Focus on low cost funds, retain more money from returns and ensure investment with proficient fund managers. Last, based on the overall situation in the market and whether it is a good time for equities or safer securities.

 

Taxability on mutual funds 

In Nepal, mutual fund schemes are tax exempted from interest income taxes, Capital gain taxes

 

FAQs

1. Is it good to invest in lump-sum investments?

Lump-sum investments can be good if you have a large sum of money to invest and the market conditions are favourable.

2. Is lump-sum investment risky?

Yes, lump-sum investments are riskier because they are exposed to market fluctuations all at once.

3. Which lump-sum is best for 5 years?

A balanced or hybrid mutual fund is often ideal for a 5-year investment horizon, offering growth with moderate risk.

4. What is an example of lump-sum investment purchase?

Investing a large sum of money, such as NPR 100,000, in a single mutual fund at once is an example of a lump-sum investment.

5. Is lumpsum investment suitable for inexperienced investors?

Lump-sum investing can be risky for inexperienced investors because it requires market timing and research.

6. Is Lumpsum investment profitable?

Lump-sum investments can be profitable if invested at the right time in a growing market, but they carry higher risk.

7.How do I choose between lump sum and SIP?

Choose SIP for regular investing with lower risk and lump-sum if you have a large amount to invest and are comfortable with market timing.

8. Can I switch from SIP to lumpsum in the same Mutual Fund?

Yes, you can switch from SIP to lump-sum in the same mutual fund

9. How does market timing affect lump sum investments?

Market timing can greatly affect lump-sum investments, as buying during a market high may lead to lower returns, while buying during a low can maximize gains.