When it comes to investing, risk and profit are two sides of the same coin. The common belief is to get bigger returns. One must take more risks. Unfortunately, the opposite is invalid: taking a big risk doesn’t always mean you’ll get an enormous reward. Taking a high risk isn’t always negative, but it’s important to use strategies to assist limit investment risk.
Assume you own a part of a piece of land in your ancestral village that was just sold for Rs.10 lakhs. You’d want to put these assets to good use to protect your future. You’ve had a few questions on your mind. Is investing a large sum in mutual funds a wise idea?
Can I invest in mutual funds in one lump payment, or do I need to invest in SIPs over some time? What are the best mutual funds for lumpsum investments in India, and should I invest in equities, debt, or liquid funds? When planning a lumpsum investment in mutual funds, there are five crucial considerations.
Diversification
When it comes to investing, diversification is the key to reducing risk. Mutual funds provide diversity, and as a result, they have been a popular investment option in recent years. However, the nature of diversification varies per the scheme, and among the various plans offered in the industry, well-diversified ones that have an optimal allocation between equity and debt based on age, financial time horizon, and risk profile offer the finest diversification opportunities.
Understand the market conditions
Whether you like it or not, you must be concerned about market timing when you invest a large sum in mutual funds. For example, if you invest in the market during high volatility, your portfolio may lose another 10% of its value. That might be alarming, especially if you have a large portfolio and your portfolio worth drops 10% in a few days. To acquire a sense of market values, consider market P/E ratios and Market Dividend Yield ratios.
Systematic transfer plan
The systematic transfer plan (STP) is the most acceptable alternative for avoiding overvalued markets while investing in lumpsum payments. STPs use rupee cost averaging in the same way as SIPs do. Investors may relax about inflated markets by averaging out the purchase cost. When your long-term financial objectives are approaching maturity, STP can help. Shifting money from equity to ultra-short-term debt funds will aid in consolidating profits by lowering downside risk.
Asset Allocation
Regarding asset allocation, the objective is to strike a balance between risk and return. Investing in diverse asset classes such as shares, mutual funds, loans, real estate, and gold is known as asset allocation. The correct assets should be chosen based on one’s financial objectives.
The duration of your aim will determine the asset class you choose. Debt funds are appropriate for short-term purposes. Equities, on the other hand, are great for long-term ambitions. As a result, the right asset class for investing should be chosen depending on the length and your risk appetite.
Avoid Overlapping Schemes
Although the investments are directed via separate fund companies, some topics or industries may overlap when picking plans. This overlap causes a concentration, resulting in the portfolio missing out on chances in other sectors, issues, or categories that may contribute value.
As a result, pick schemes carefully; before investing, risk profile, check for objectives, scheme type, and category, and ensure that there are no overlaps with current schemes in your portfolio in terms of theme, category, sector, and so on.
Conclusion
Before you start a SIP into any mutual fund, ensure that the goals and riskiness of the mutual fund scheme you’re considering meet your risk tolerance and profile. You can start a SIP once you’ve determined that a mutual fund is appropriate for you to invest in. You’ll need a bank account that you can link to your investing account. You may use ECS or give your bank absolute rules to transfer a specific amount from your account into the mutual funds of your choosing on preset dates to make the SIP investment process go smoothly.
