Understanding the importance of setting an investment strategy when investing in a lumpsum plan

Mutual fund investments are the cornerstone of most investors’ portfolios today. They offer a wide range of benefits such as diversification, professional fund management, low cost, and more. Another important benefit is the flexibility and route of investment – when you invest in mutual funds you can do so either through a lumpsum plan or a Systematic Investment Plan (SIP).

While SIPs are one of the go-to choices for mutual fund investments among most retail investors, lumpsum plans are also beneficial for when you have a large amount of investible corpus, and the market conditions are right. However, unlike an SIP investment, you cannot just pick a fund and start investing. You need to set an investment strategy before you make the lumpsum investment. Here’s why and how to do it.

  • Paying attention to the market condition and timing

When making a lumpsum investment in a mutual fund, you need to be cognizant of the market condition and timing. Investing when the prices are high and about to fall soon is not a smart decision. Instead, investing during a market correction when you can add promising stocks and other underlying securities in a mutual fund to your portfolio at a discounted price is strategic. Hence, you need to plan your lumpsum investment accordingly.

  • Knowing your goal and investment horizon

Unlike an SIP, where you invest small amounts regularly over a period, in a lumpsum plan you invest a significant amount of corpus in one go. Hence, you need to know what your financial goal is and for how long you can let this money stay invested. Mutual funds such as equity mutual funds require an investment horizon of at least five to seven years to give good returns and hence the liquidity is lower. So, when making a lumpsum investment in an equity mutual fund, you should ensure that you won’t need that money soon and can let it sit for long-term wealth generation.

  • Deciding on your investing strategy

There are several investing styles and strategies out there such as value investing, growth investing, index investing, international investing, and thematic investing. Before you make a lumpsum investment, you need to decide on what strategy you will be adopting and then pick a mutual fund accordingly. For instance, if you want to add international exposure to your portfolio but in a low-cost and safer way, you can invest in an international index fund such as an S&P 500 index fund.

Last words

While it may require some time and planning, it’s best to set a solid investment strategy before investing in a lumpsum plan. This will allow you to invest in a way that aligns with your financial goals, risk tolerance, and investment horizon while making the most of the current market conditions. It will also help you pick the right types of mutual fund scheme to invest your corpus in and diversify your overall investment portfolio in a way that reduces risk and aims to maximise returns.