Lumpsum
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Lumpsum
If you are new to investment, it’s not surprising if you are unsure about the term lumpsum. It’s your investment, and you don’t want to make the wrong choice. Lumpsum in mutual fund investments refers to a single large amount of money invested all at once instead of making weekly or monthly payments.
Lumpsum investments have their own benefits and importance that other investments can’t provide you. That’s why many people prefer to invest in lumpsum. Here’s everything you need to know about lumpsum investments.
What is lumpsum?
The word lumpsum generally means a large amount of money. When it comes to investments, it means investing a large amount of money at once instead of dividing the amount into smaller instalments. In lumpsum investments, you will only pay once. Lumpsum investments are for those who have a substantial sum of money at hand or in their bank accounts and are comfortable with investing such a large sum at once.
Understanding lumpsum
Lumpsum refers to investment money in bulk in a single payment. It refers to investing in a one-time mutual fund, hence the term lumpsum. It’s a popular form of mutual fund investment as it relieves investors of all the calculations of making small payments at regular intervals. Also, with lumpsum investment, the amount of money you invest will be locked in until the investment period is over. So, make sure you are comfortable with investing a large sum of money, also known as lumpsum for a significant period.
Benefits of lumpsum
The benefits of lumpsum investments are what make this investment option so popular among first-time investors. It provides investors with an edge over other investment options, including higher return on investment, long-run benefits, convenience, etc. Here are all the benefits of lumpsum investments in detail.
- Single payment
In a lumpsum investment, you only need to pay once. You will pay the one-time payment at the beginning of the investment, and that’s it. You don’t need to pay a single penny after that, so there are no weekly payments, monthly payments, or any other form of hidden charge.
- Long-term benefits
If you are planning to invest your money for a longer period, you will receive several long-term benefits, including higher ROI, higher growth phase, etc. Now, if you combine a long-term investment period with a larger sum of money during investment, it will lead to an even higher ROI.
- Bulk investment
In lumpsum investment, you make a payment in a single bulk amount. This bulk amount will then have the chance to grow exponentially with changes to the market valuation. The higher the lumpsum amount, the higher the return on investment.
- Convenience
Any investment options that require monthly or weekly payment modes, will ask you to make payments within a specified date. If you fail to pay within that stipulated date, there could be some sort of penalty. So, you will have to pay the penalty at the next payment cycle. Not to mention, you will have to remember to keep the cash for the next payment prepared before the next payment date arrives, which can be very inconvenient.
- Higher return on investment
Lumpsum investment will always lead to higher ROI as compared to investments that require recurring payments. But remember that the actual returns heavily depend on how the market behaves. So keep a close eye on the market fluctuations.
Importance of lumpsum
Lumpsum investments can be very important to first-time investors, thanks to the way it is designed and the benefits it provides. Here are some of the factors that contribute to the importance of lumpsum investments.
- Simplicity
Lumsum investments are simpler. You only need to make a one-time payment at the beginning of the investment and nothing more. This is a stark contrast to other investment options where you need to make payments in regular intervals.
- Appreciation of total capital
Lumpsum investments are oriented toward long-term investments and market changes. So, no matter how large your capital is, you will benefit from every growth in the market. The larger the capital, the higher the benefits.
- Minimal extra charges
Unlike other investment options, lumpsum investments only require you to pay once, so there’s minimal chance of incurring any extra charges. In lumpsum investment, you don’t need to pay any penalty or missed payments as there are no recurring payments.
Examples of lumpsum
You invested an amount of US$700 in a mutual fund investment for 10 years with an average return of 15% per annum. Since this interest is compounded annually, the estimated ROI would be approximately US$2,832 at the end of the investment. That is around 4 times the sum of money that was initially invested.
Frequently Asked Questions
Lumsum investments refer to investment options where you make payments in the form of one lump sum payment. Lumpsum payments, on the other hand, refer to the mode of payment, that is, a single payment, as opposed to recurring payment modes.
Lumpsum investment and SIP investments are the complete opposite of each other. They differ in terms of potential investors, mode of payment, and investment period.
- Potential investors
Lumpsum investment is for those who have a lot of cash in hand. But SIPs are for those who can’t make one large payment and prefer to pay in smaller amounts.
- Mode of payment
In lumpsum investment, you make only one large payment, and that’s it, while SIP investments require you to make small payments every week or every month.
- Investment period
In lumpsum investments, the benefits truly shine when you invest for a larger period. But, SIPs are for those who prefer to play safe by investing for smaller periods.
There’s no straight answer. In theory, lumpsum investment should provide a better ROI, but the reality can be quite different. This is due to the fact that both lumpsum and SIP investments are a form of mutual fund. Hence, they are dependent on the changes in the market value. If the market value increases, lumpsum will provide a better ROI, but if the market value decreases, SIP may provide a better ROI.
Here are some of the factors that you should consider before doing lumpsum investment.
- Market valuation
- Return of investment
- Liquidity expectations
- Your patience level
Lumpsum refers to the amount of money that is deposited during the one-time payment of a mutual fund investment.
Related Terms
- Floating Dividend Rate
- Real Return
- Non-Diversifiable Risk
- Liability-Driven Investment (LDI)
- Guaranteed Investment Contract (GIC)
- Flash Crash
- Cost Basis
- Deferred Annuity
- Cash-on-Cash Return
- Bubble
- Asset Play
- Accrued Market Discount
- Inflation Hedge
- Incremental Yield
- Holding Period Return
- Floating Dividend Rate
- Real Return
- Non-Diversifiable Risk
- Liability-Driven Investment (LDI)
- Guaranteed Investment Contract (GIC)
- Flash Crash
- Cost Basis
- Deferred Annuity
- Cash-on-Cash Return
- Bubble
- Asset Play
- Accrued Market Discount
- Inflation Hedge
- Incremental Yield
- Holding Period Return
- Hedge Effectiveness
- Fallen Angel
- EBITDA Margin
- Dollar Rolls
- Dividend Declaration Date
- Distribution Yield
- Derivative Security
- Fiduciary
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- Share Classes
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Most Popular Terms
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